Priority Technology Holdings, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Priority Technology Holdings fourth quarter 2020 earnings conference call. At this time, our participant line is on a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded, and if you require any further assistance, please press star 0. I would like to hand the conference to your speaker today, Dave Falpel. Please go ahead, sir.

Thank you, Victor. Good morning, and thank you, everyone, for joining us. I'm Dave Falpel. I'm the Chief Marketing Officer here at Priority Technology Holdings. And with me on the call today are Tom Priori, our Chairman and Chief Executive Officer, and Mike Volkamer, our Chief Financial Officer. Now, before we provide our prepared remarks, I would like to remind all participants that our comments today will include forward-looking statements, which involves a number of risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. The company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events, or otherwise. We provide a detailed discussion of the various risk factors in our SEC filings, and we encourage you to review these filings. Additionally, we may refer to non-GAAP measures, including but not limited to EBITDA and adjusted EBITDA during the call. Reconciliations of our non-GAAP performance and liquidity measures to the appropriate GAAP measures can be found on our press release and SEC filings available in the investor section of our website. With that, I'd like to turn the call over to our Chairman and CEO, Tom Priori.

Thank you, Dave. And thanks to everyone for joining us for our fourth quarter earnings call. I'd like to begin this morning's call by providing a brief overview of our impressive Q4 and year-end results, along with a discussion of the acquisition of Fincera during the current quarter. Then I'll turn it over to Mike, who will go into more detail on our segment-level performance, financial highlights, and the improvement on our balance sheet. As you saw in our earnings release, the momentum that we built in Q3 continued through Q4. Our performance is the result of executing our plan through a challenging year due to the COVID-19 pandemic. We continue to invest in our people and culture, our products, and our technology infrastructure. The strength of our payment operations, product offerings, and having diversified countercyclical payment assets allowed us to quickly adapt to the changing COVID environment to deliver strong top-line revenue growth and bottom-line results. This was a statement year in the history of our organization. As consumers and businesses continued to struggle with restrictions related to the pandemic, our teams were focused on solving our customers' problems and helping them perform in this environment. Our results today show the success of that mission. Revenue of $106 million increased 8.1% from $98.2 million for the quarter and increased 8.7% for the full year despite the impact of the COVID lockdown period. Income from operations of $6.2 million increased 489.3% from $1.1 million for the quarter and rose to $20.9 million for the year, an increase of 190.4%. Meanwhile, adjusted EBITDA of $18.2 million for the quarter represented an increase of 12.7% from $16.2 million from the prior year period. For the full year, adjusted EBITDA increased 19.4% to $70.3 million, despite the loss of rent payments contribution during the fourth quarter of 2021. Recently, we announced an agreement to acquire Fincera Holdings, a pioneer in the fintech industry and a company that launched and operated one of the first banking as a service platforms. Combination positions us as a leading innovator in payment and financial technology solutions with the ability to deliver payment facilitation and banking-like services at scale to our software partners, SMB and enterprise merchants, and our integrated partner businesses' vertical software applications. CFTPay, Fincera's flagship application that provides account administration solutions to the burgeoning and counter-cyclical debt settlement industry will operate as a wholly-owned subsidiary of priority within the consumer finance division of our integrated partners business segment. We feel that this acquisition completes our payment infrastructure platform to fully monetize payment networks, given our combined ability to handle all forms of money or value in motion and at rest in virtual bank accounts and digital wallets. In short, we're a one-stop shop for modern software companies looking to monetize payments in acquiring and issuing without the headaches of managing payment operation functions like client service, risk management, underwriting, and compliance. We expect this transaction to close once the transfer of Fincera's nationwide money transmission licenses are complete in the next six to nine months. I'd now like to hand it over to Mike Volkamer to provide further insights into the quarter, current trends in each of our business segments, and the improvement in our balance sheet and liquidity. Mike?

Thank you, Tom, and good morning to everybody. Yesterday's press release provides results for the comparative quarters and the years ended, December 31, 2020, and 2019, on a gap basis. It also provides very relevant highlights of the results on a more comparable basis that exclude the rent payment assets sold on September 22nd, 2020. So my fourth quarter comments will focus on amounts excluding rent payment in the 2019 fourth quarter in order to provide the most meaningful review of our fourth quarter results and trends. The last two pages of yesterday's press release provide reconciliation and full year 2019 and 2020 gap results with the results excluding rent payment. And I'd also like to point out that the attachments to our March 10th press release provide this same reconciliation for each quarter within 2019 and 2020. Consolidated revenue in the fourth quarter of 2020 was $106.2 million, a 12.3% increase from the $94.5 million in the 2019 quarter. Throughout 2020, our diverse distribution channels continued strong new merchant boarding. Nearly 13,000 merchants were added in the fourth quarter. This led to a December that was the highest revenue month of 2020, and this strength has carried into the first quarter of 2021. Gross profit was $32.5 million, a 15.5% growth from $28.2 million in the 2019 quarter. Gross profit margin of 30.6 percent increased 84 basis points from 29.8 percent in the 2019 quarter. Income from operations of 6.2 million was a 354 percent improvement over 1.4 million in the 2019 quarter. Selling, general, and administrative expenses included non-recurring expenses of 1.3 million compared with $2.6 million in the fourth quarter of 2019. And those items are detailed within our press release for you to reference. Adjusted EBITDA of $18.3 million increased 35.2 percent from $13.6 million in the 2019 quarter. Now, similar to revenue, December was the highest adjusted EBITDA month of 2020, and this strength has also carried into the first quarter of 2021. Now let's break this down within the segments. Consumer payments revenue was $100.8 million. This is a 15.3% increase over $87.4 million in the 2019 quarter. Growth was driven by a six-fold increase in high-margin specialized merchant acquiring revenue, which contributed $9.8 million of growth. And this was supplemented by an overall 3% increase in merchant bank card volume. Merchant bank card volume processed was $11.1 billion compared with $10.8 billion in the 2019 quarter. Merchant bank card transactions of $120.3 million declined 6.8% from $129.2 million in the 2019 quarter. However, average ticket of $91.99 grew 10.5% from $83.24 in the prior year quarter. These year-over-year dynamics are similar to those that we saw in the third quarter of this year. Pandemic-related economic factors have impacted the merchant volume mix, including shifts in payment transaction activity among certain vertical industries. Spending trends have resulted in consumers conducting fewer payment transactions but at higher average values. And card-not-present transactions have increased. Card-not-present transactions generally offer more favorable pricing for priority than swipe transactions. Consumer payments income from operations was $12.9 million. This is a 29.5% improvement of $3 million over $9.9 million in the 2019 quarter. Key drivers are a 5.3% increase in gross profit, which was partially offset by increases of $1.8 million in SG&A, and $0.7 million in depreciation and amortization. The increase in SG&A largely resulted from non-recurring activity in each year's fourth quarter. The 2020 quarter included $1.2 million of non-recurring asset write-downs, partially offset by a benefit of $0.4 million in the reduction of contingent consideration. The 2019 quarter included a $0.6 million benefit from reduction in contingent consideration. These non-recurring items are detailed on page 5 of yesterday's press release for your reference. Commercial payments revenue was $3.9 million. This is a $2.6 million decrease from $6.5 million in the 2019 quarter, due largely to curtailment of certain programs within managed services. Revenue from processing in our CPX accounts payable automated solutions business continued its steady performance with revenue of $1.5 million, which approximated the 2019 fourth quarter. Commercial payments lost from operations was $0.5 million, compared with income from operations of $0.2 million in the 2019 quarter. Gross profit was down $1.3 million, which was partially offset by a reduction of $0.6 million in other operating expenses. Integrated Partners revenue is $1.5 million. This is a $0.8 million increase from $0.7 million in the 2019 quarter. Now, Integrated Partners includes Priority Real Estate Technology, Priority PayRight Health Solutions, and Priority Hospitality Technology. Pret continues to serve the real estate market through our ongoing payment processing arrangement with MRI, as well as our landlord station business. Pret was the largest contributor to this segment's growth over the 2019 quarter. Now, Hospitality's ETAB products, revenue, and profits are reflected within the integrated partner segment for sales made by the Hospitality team and within consumer for sales made by that channel. This reporting under-reflects the tremendous growth we've been incurring within ETAB since its introduction. Of course, both channels' fourth quarter volume grew 327%, with transactions up 251%. Total revenue approached $400,000 in the fourth quarter of 2020 across all channels. This growth is carried into 2021 as ETAB continues to gain wider acceptance among our hospitality merchants. And we are also seeing similar acceptance momentum within our pay-right products. Corporate expense was $6.1 million compared with $8.5 million in the 2019 quarter. Included in the 2020 fourth quarter were non-recurring expenses of $0.4 million, and that compares with non-recurring expenses of $3.2 in the 2019 quarter. And again, these non-recurring items are detailed on page five of yesterday's press release. Now let's move on and review our significantly improved liquidity positions. As you recall, at the end of the first quarter of 2020, net debt was $496.5 million, and total net leverage ratio was 7.67 times. Our cash position stood at $2.9 million at that time, and we had $10 million of borrowing capacity on our $25 million revolver. At that time, we said that we were laser-focused on improving liquidity in 2020. We ended the year with net debt of $372.8 million, a $123.7 million reduction in nine months, and a total net leverage ratio was reduced to 5.85 times. Our cash position was $9.2 million at December 31st, and we have $25 million of borrowing capacity on the revolver, having repaid the remaining $11 million outstanding during the fourth quarter. We continue to be laser focused on improving liquidity in 2021. We're in the midst of refinancing our debt, which will not only reduce interest rates, but will reduce mandatory debt amortization by well over $40 million in the next two years. Our liquidity will be further enhanced with a new $40 million revolving credit facility and ready access to preferred equity for accretive acquisitions. Now, before turning the call back to Tom, I'd like to review the guidance that we provided in our March 10th press release. This guidance does not include any increases related to the acquisition of Fincera, which is expected to close in six to nine months. Revenue is expected to range between $450 to $470 million, a growth of 15% to 20% above 2020 revenue of $392 million, excluding rent payments. Adjusted EBITDA is expected to range between $76 to $80 million, a growth of 22% to 29% above 2020 adjusted EBITDA of $62.1 million, excluding rent payment. The strength we're experiencing so far in the 2021 first quarter bodes very well for achieving these earnings objectives. So now I'd like to turn the call back over to Tom.

Thanks, Mike. As Mike shared, we had very strong growth in Q4 and during fiscal year 2020. The momentum we built in December is continuing for us into the first quarter of 2021 as measured by top line revenue and bottom line adjusted EBITDA growth. As you can see from our strong results through COVID and as the economy reopened, we have a resilient business that performs through varying business cycles. It's built to last. and it's built with intention. Our core merchant acquiring business is the fifth largest by volume among non-bank acquirers, while our CPX automated payables product is market leading among its peers. And within our integrated partners segment, we can expand and monetize vertical strategies like we have with rent payments and Fincera with relative ease. That reality is becoming clear to a broadening base of customers, investors, and market analysts as we continue to perform and accelerate our operating and technology platform developed for the future of payments. As a company, we are energized by the collective quest to make payments easy, and our organization is moving with purpose towards that mission. Operator, we'd now like to open the line for questions.

Ladies and gentlemen, as a reminder to ask a question, you need to press star one on your telephone. And to withdraw your question, press the pound key. Please sign by while we compile the Q&A roster. Our first question will come from Brian Kintzler from Alliance Global. You may begin.

Hi, guys. Thanks for taking my questions. Can you talk about any seasonality in your commercial payments business? It sounded like December was the strongest volume ever, and you said that carried into the first quarter. So that suggests to me we shouldn't see any material seasonality. Is that right?

Yeah, we don't really experience seasonality in that business. You know, what's delayed some of the growth trajectory that, you know, we had in our pipeline has really just been COVID-related and the way banks operate responded to COVID. So that, you know, just a reality of that shutdown and kind of taking a moment to kind of reassess among our bank treasury partners in terms of how they were going to really push forth on automated payables, which I think generally in the market has largely been travel and T&E and fleet. So, you know, the good news is they're recognizing that, you know, true automated payables is a much more important element of their commercial card platforms. And, you know, we're just now seeing the benefit of that momentum picking up.

So, you know, I was asking broader on the seasonality, but to my point, another question I had was on CPX revenue. has flatlined throughout 2020. Is that what you're referring to as banks? I guess let me take a step back. On CPX, are customers reluctant, enterprises reluctant right now to take this in this environment? What has led to the flatline of that business? And then what are you doing that you think will drive much stronger demand for that business in 2021?

Yeah, sure. So actually volume is up considerably. So it really is just a change in margin mix. And yeah, we have a different margin profile on bank volume versus direct. So we've actually seen adoption of card both in what I'll call kind of pure commercial payments as well as the B2B acquiring segment, pick up. And we expect that trend to continue. The driver of the acceleration in the commercial side is really just going to be the adoption among our pipeline that's in position to close and driving that adoption through to Treasury clients within that bank segment.

And to get back to, on the commercial side, 4,500 to 5,000 merchants a quarter, which you highlighted in your slide deck, is there any more investments that you're making or need to make, or is that all a function of probating? Those merchants.

Just to be clear, those are on the acquiring side? Yeah. And, you know, we've kind of steadily, you know, been at that rate. December's, you know, normally a little bit, you know, below just because it's the holiday season. So we'll see boarding drop off. But, you know, the trend in that level of boarding through, you know, even through COVID and, you know, as the economy recovered, has been very consistent, and it remains so in the early part of 2021. Okay. Thank you. Yeah, absolutely. Hey, if I could just make one other comment, as I think it's relevant to kind of where you're going on the commercial side, is we do not need to make any additional investment in that business as it scales. So it's As I mentioned in kind of my notes, this has been built with intention. It's been built with purpose. We're poised for that momentum we already see in the pipeline, and we don't need to make additional investments to convert it.

Okay. Thanks very much. Thanks, Brian.

Our next question will come from the line of George Mialos from Callen. You may begin.

Hey, guys. Good afternoon. Thanks for taking my question, and happy St. Pat's to you both. Thank you as well, George. I wanted to start off. Can you remind us, in the fourth quarter within the consumer business, how much of that is card not present today? And then as you think about the outlook for – 2021, what kind of growth rates are you incorporating in the guidance, again, for that e-com business?

Sure. The e-com business is, from a card not present transaction perspective, we see the consumer behavior probably holding. I think as volume grows, You know, with the reopening, say, of the Northeast and restaurants, people going to restaurants, yeah, there'll be volume coming on that's card present. But a lot of what's, you know, built into the fabric of people's behaviors from a, you know, a not present activity, you know, we don't see that receding. When you ask a question about, you know, what growth from the e-commerce, if you're talking about the Specialized Merchant Acquiring Program, which we've had, you know, really exceptional growth throughout 2020, We see continued growth in that business. You know, we're forecasting a more conservative growth than obviously we had in 2020. But, you know, it grew largely in the second half of 2020. So we're really riding a good crest of year-over-year comparison in the first half of the year. So it continues to grow nicely. But we don't have it forecasted to grow at the same rate, obviously, as it did in 2020.

Understood. And that's obviously just for comparison issues, just given the strength that you saw in 2020, right? It sounds like you're still entirely encouraged by what you're seeing. Oh, absolutely, yes. Okay, great. And just last question for me, maybe to ask the prior question a little differently. The 450 to 470s, of revenue that you're contemplating for 21. Any thoughts around kind of the cadence of how that revenue growth might progress throughout the course of the year? Just want to make sure we're thinking about that appropriately. Thanks, guys.

Yeah, well, you know, we've been growing, you know, when you have, you know, the comparative quarters have been a little difficult this year, right, because I think, You know, you're going to see really exceptional growth in Q2. Last year was, you know, flat year over year, even though we grew even back. So Q2 this year is going to be over 30%, we think. But, you know, the other quarters are in, you know, in the teens, you know, the mid-teens, kind of, you know, consistent with what we've been seeing this year.

And, George, perhaps if you're referencing sort of the contribution – over of that, you know, of kind of the revenue range over time, we don't see a lot of seasonality in the book. So it's, you know, it's relatively consistent throughout the year. But as Mike noted, you know, given some of the, you know, the COVID period, you know, that's going to be the biggest gap in terms of year-over-year growth.

Appreciate the color. Thank you.

Thank you, George.

And as a reminder, to ask a question, that's star one. Star one to ask a question. Our next question will come from Andrew Scott from Roth Capital. You may begin.

Hey, good morning. Congrats on the quarter. First question is just on guidance. I believe you said... revenue in EBITDA does not account for the impact of the Fincera acquisition. I was just wondering, does that include in EBITDA any integration or kind of ramp-up costs in there, or does that not include anything even on the cost side of the business?

We've not included in that projection any synergies. So We think there's – and we know that there is a meaningful amount there. The platforms are very complementary. So even the cost of, let's say, achieving some of the synergies, which really amount to contract consolidation expenses, things like that, which we've already, you know, examined are, you know, less than $250,000. Great.

Thank you. And then the second question here, a little bit different. Have you guys seen, um, a shift in kind of the industries where, where your merchants are seeing demand now that the, uh, the economy's opened and, and are there any, uh, kind of segments that are still being pressured? And then secondly, um, Is there any chance you guys could see with the second two rounds of stimulus checks coming out, any bump in consumer spending that you guys could get some incremental boost from?

So as it relates to your first question, areas where we had seen lift throughout the year – Wholesale trades, as you might expect, like trades, businesses, plumbing, electrical, landscaping, those types of things, that is more and more moving to digital transactions. So that transition has kind of been in motion. We see that continuing. That will certainly be an area of lift. But from a volume perspective, you know, look, the overall hospitality space and, you know, as you might imagine, kind of salon and so forth is down relative to, you know, its historical norm. But, you know, from the heights of COVID, tremendous rebound. Nevertheless, it's still, you know, flattish to down versus down. you know, versus prior years. But that decline is more in the single digits. So, you know, until we kind of fully reach herd immunity and, you know, we get, you know, more of the safety concerns, you know, are fully alleviated, we would probably We've modeled an expectation that we'll sort of stay in this kind of steady state until we see a bump as people just get back out in greater numbers. The good news is those segments, because they're card-present, They are very thin margin areas in the merchant acquiring space. So they have less of an impact at the recurring net revenue and gross profit level for us. So hopefully that answers your question. And Andrew, I apologize. You had a follow-up, and I can't quite remember the granularity on it. Would you mind...

Yeah, no problem. And that answer was very, very helpful, so I appreciate it. The second one was just with the two rounds of stimulus checks that have come out and potential boost to consumer spending, do you guys see any kind of incremental upside there or any possibility of that?

You know, I would, and I'll ask Mike to comment, and I'll just say within our thinking, we haven't modeled in any expectation that that's going to have a meaningful impact on you know, spending trends that we would see. I think, you know, more importantly, particularly with the addition of, you know, now with the addition of the Fincera business is, you know, we've modeled what historically there has been, you know, growth of north of 20%, upwards of 30%. You know, the stimulus checks have actually, I think, we think held down the capacity of that business. And, you know, once the once the punch bowl is taken away, you know, it's more than likely we're going to see more consumer activity within, you know, the debt settlement arena that would, you know, meaningfully benefit, you know, the Fincera business line as the administrator to those consumer accounts, you know, to help them arrange for debt relief. So, you know, so we feel like The combination of our platform is going to, again, it's just going to perform well through all business cycles, and we're already seeing the benefit of the transition from segments that were historically non-card going to digital payments, so we'll benefit there. And as we do see some of the stimulus get extracted, we expect the counter-cyclical segments that Fincera operates will do quite well while we begin to inject their technology into our existing business lines for integrated payments. Mike, anything you would add?

No, I think that that's right. We certainly don't expect to see the stimulus driving volumes in a noticeable way.

If it does, it would just be upside to our current case. Exactly.

Thank you. I'm not showing any further questions in the queue. I'd like to turn the call back over to Tom Priori for any closing remarks. All right.

Thank you very much, Operator. I would just like to thank everyone very much for their interest in our business and and for participating in the call today. I hope everyone has a fantastic St. Patrick's Day, despite the unusual way in which we're celebrating it. But everyone have a great day. Thank you very much.

Ladies and gentlemen, this concludes the conference call. Thank you for participating. You may now disconnect.