Ladies and gentlemen, thank you for standing by and welcome to the Priority Technology Holdings' Third Quarter 2020 Earnings Call. I would now like to introduce you to today's conference call Mr. Chris Kettmann. You may begin, sir.

Good morning and thank you for joining us. With me today are Tom Priore, Chairman and Chief Executive Officer of Priority Technology Holdings; and Mike Vollkommer, Chief Financial Officer. Before we provide our prepared remarks, I would like to remind all participants that our comments today will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, regarding future expectations about the Company's business, management's plans for future operations or similar matters, which are subject to certain risks and uncertainties. The Company's actual results could differ materially due to several important factors, many of which are beyond the Company's control including those risks and uncertainties described in the current report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2020.

Thank you, Chris, and thanks, everyone for joining us for our third-quarter earnings call. I would like to begin this morning's call by providing a brief overview of our impressive third quarter results along with the discussion of the sale of our rentpayment.com assets during the quarter. Then I'll turn it over to Mike who will go into more detail on our segment-level performance, our continued cost-control initiatives, and the improvement of our balance sheet. As you saw in our earnings release, we reported exceptional third quarter 2020 results reflecting strong demand in each of our business segments despite continued challenges associated with the COVID-19 pandemic. The momentum we saw in May and June carried forward into the third quarter. As the strength of our product offerings and diversified counter-cyclical assets allowed us to quickly adapt to changing COVID environments to deliver a strong top-line revenue growth and bottom-line results. There are a few quick highlights I'd like to share. During the quarter, revenue in our core consumer segment grew by 20% year-over-year as merchant bankcard processing dollar volume increased 6.3%. Within this, we saw an explosive 800% growth in our specialized e-commerce segment driven by increased online purchase activity. Gross profit was $34 million during the period, up nearly 13% from a year-ago's quarter and adjusted EBITDA of nearly $20 million increased 28.1% from the third quarter of 2019. This EBITDA improvement was driven by a combination of broad-based demand for our services, continued disciplined driving automation and expense reduction initiatives, and the counter-cyclical nature of many of our payment assets. During the quarter, we also announced a definitive agreement to sell our rentpayments.com assets to MRI Software. As you know, we founded Priority Real Estate Technology in 2018, and it is comprised of a number of real estate technology assets.

Thank you, Tom, and good morning to everybody. I'll begin by reviewing the very strong revenue and income trends on a consolidated basis, the pro forma impact of the rent payment sale, and then I'll provide commentary on business segment performance. All comparisons will be between the third quarter of 2020 and the third quarter of 2019 unless I say otherwise. Our revenue growth momentum has returned and is now stronger than the pre-pandemic rates. Total revenue amounted to $109 million for the third quarter, this is a 16.1% growth over the prior quarter and an 18% growth over this year's second quarter. As previously discussed, we began 2020 with very strong revenue growth through mid-March. Then COVID hit in mid-March and the total first-quarter revenue growth came in at 10.6%.

Thanks, Mike. I'd now like to share more detail around the most recent trends we've been seeing in the overall business. While the global pandemic continues to impact Priority in a number of ways, we're pleased to have rebounded from its initial impact earlier in the year in a way very few in our industry have been able to do. As Mike noted, processing volume grew by more than 6% in the quarter, and we saw outstanding performance from our e-commerce business. Commercial Payments remain relatively steady, particularly in CPX accounts payable, and our automated solutions and integrated payments continued to grow. Underlying the strength of our product offering and best-in-class client service, our merchant adoption trends remain consistent with historical levels of 4,500 to 5,000 new merchants added per month. Importantly, we've continued to see the strong third-quarter trends carry into the fourth quarter with total bankcard processing volume in October exceeding $4.3 billion. That's an improvement of nearly 5% over 2019 despite one less processing day in October 2020. This happens to be the highest ever bankcard processing month in Priority's history, generating consolidated net revenue of $37.9 million. Based on our current operating margins, this would imply consolidated EBITDA of $6.7 million for the month of October 2020, an annualized run rate excluding the income from the rentpayment.com sale of $80 million, and looking forward, a run rate leverage of 4.6 times. Our performance throughout the pandemic reflects several key operational and strategic differentiators. First and foremost, Priority's payment technology and operating infrastructure is purpose-built to deliver processing scale, agility, and responsiveness to monetize merchant networks for our partners. Second, our diverse sales channels have continued to add net new merchants which remains one of the lifeblood of our business. Lastly, the value of our integrated product offerings across these channels in real estate, hospitality, healthcare, B2B payments, and automated payables has allowed us to tap into broad and diverse merchant networks in consumer and corporate payments ensuring we mitigate risk from a downturn in any one area of the economy. Just as important, we believe that the conditions influencing behavior in the current environment signal a significant change in how businesses will need to operate in the future and we are well positioned to cater for that new behavior. Increased use of technology to support contactless e-commerce, integrated software with digital collection tools to support healthcare, revenue cycle, real estate payment collections, and accounts payable for businesses of all sizes will likely perform well. Although we're extremely proud of our success over the past six months, especially during a global pandemic, I can assure you we will not take our foot off the gas. We'll continue to work hard to leverage our diversified counter-cyclical business to adapt to the evolving economic environment while remaining disciplined with our cost structure, especially as COVID cases rise in the US and states evaluate reinstituting stay-at-home orders. We will also look to identify ways to bolster our balance sheet by reducing debt and enhancing overall liquidity, giving Priority the flexibility necessary to navigate through this uncertain environment while also investing in our long-term future. Before I wrap up, I'd like to quickly thank the Priority team for their continued hard work and dedication over the past six months. It hasn't been easy, but our success reinforces the exceptional talent we have throughout the organization and the quality of the platform we've built over the past several years. I'd also like to acknowledge a new member of our team, Dave Faupel, as our Chief Marketing Officer. Dave has more than 25 years of experience building high-performing marketing teams, enhancing brand value, and driving revenue throughout organizations, and we are excited to welcome him to the team as we enter our next phase of growth. In conclusion, we're very pleased with our third-quarter results, especially in light of the ongoing impact of COVID-19, and we are excited about the opportunity to build our partnership with MRI Software. As we move further into the fourth quarter, we expect the momentum of our integrated product and payment infrastructure as a service offering to deliver additional growth, and we'll remain focused on leveraging our platform to drive greater value to our shareholders.

We'd now like to open the line for questions.

This is Jacob on for Brian. Thanks for taking my questions. With the second wave of the pandemic across the US, have you seen any changes in the volumes of your businesses in October, early November?

We've not. As mentioned in October, it actually was our highest processing month ever. And we've continued to see, I'll say a similar growth year-over-year through the early part of November. So we are - we're very optimistic about the continued consistency through the quarter.

And a couple of more. Can you highlight industries where your business is seeing solid demand and alternatively where industries are being pressured?

Sure. We've seen higher-performing segments in wholesale and trade, particularly in landscaping, farming, and HVAC segments, where more transactions have transitioned from checks to electronic payments. We've continued to see growth in the wholesale side of our business, particularly in B2B payments, where payments are being made between buyer and supplier relationships. The segments that are still down a bit on the card-present side are those you would expect – hospitality is still struggling although we have a smaller footprint in that segment, only 17% of our merchant base. By contrast, the broader economy likely has around 30% in the restaurant and hospitality category. Salons are another sector that is performing poorly, seeing declines year-over-year. On the hospitality side, we've benefitted from providing products that allow for curbside and other forms of delivery to customers, which has higher margins. Despite the drop in volume, our margin per merchant in that segment has seen some improvement, helping to mitigate the overall impact.

Can you talk about the adoption of eTab, how that's going as we head into winter when curbside pickup could be even more important?

Yes, we've seen fantastic adoption of the product, with triple-digit growth year-over-year. We've got some exciting network partners we're working on as well in that area. So we're very constructive on its future and we don't see that adoption slowing down. It's not only being adopted more broadly by the traditional hospitality segment, but we're actually seeing it used in non-traditional areas such as liquor stores and convenience stores, where they want to offer a limited online menu for curbside. We are currently in the process of adding a delivery module into eTab that we think will further expand the reach of that product.

Our next question comes from Andrew Scutt with ROTH Capital.

I actually disconnected for a bit, so if I ask a repeat question, I apologize. My first question is on the e-commerce business. So great, great numbers there, strong growth. Question is, how many of the customers that you're adding are new versus existing customers? And can you give some commentary on the pipeline there and how long it takes to onboard a new customer once they express interest?

You know, these are new customers. If you think about it this way, many of them are longtime distribution partners. We're adding, depending on the month, 100 to 400 new merchants in that segment. There have been months where it's been a bit higher or lower, but on average, that's where it's kind of shaken out over recent trends. We do not see that abating at all, and we're pretty optimistic, especially now that we've brought in a talented Chief Marketing Officer to help drive more growth in those channels as we market the capabilities of Priority more fully.

So my second question is on the CPX platform, really nice continued growth there. Can you just kind of speak to the dynamics of the market right now? The COVID-19 pandemic is still ongoing, and how that's impacting customer leads and onboarding?

Sure, sure. It's having some impact. You can see that the growth has been steady, with year-over-year results just shy of 7% growth. The growth there tends to be a bit more chunky. We're having a great deal of success down in the middle market, particularly with companies in the $100 million revenue to $500 million range adopting automated payable solutions and network software partners. These are companies that provide accounts payable management or inventory management tools looking to add payable solutions or a payment engine to their product stack, and we're seeing fantastic adoption there. We expect that to be the growth driver moving into early 2021. On the FI side, which involves treasury departments within banks, those decisions are slower, especially during the pandemic. We've pivoted our distribution focus to where the fire is hot, and we expect to see continued strong results from that focus.

Our next question comes from a Private Investor.

First, great job on the quarter, especially given the trying circumstances you're under. I wanted to lead with both the consumer and CPX segment, and thinking through the growth drivers there, it looks like there was a healthy uptick in transaction volumes quarter-over-quarter, but that seems to be partially offset by a reduction in average ticket sizes. Although that's still above historic levels on the consumer side, any sense of where both of those counterbalancing trends may be heading as we move into Q4 and beyond?

Mike, I think you actually provided some statistics on this during your segment. So if you want to do so, then I can provide some anecdotal context afterward.

Sure.

As far as Q4, guys, we kind of see a steady state with this mix, and as we get into 2021 and hopefully a vaccination rollout leads to more normalized economic activity from a historical perspective, we probably will see a higher number of transactions and maybe lower ticket averages trying to blend back in. But in the short term, Q4 is looking like Q3 and it relates to shifts in behavior from the pandemic. Now, it's hard to say how much of those shifts will be permanent versus reverting back to normal levels. Net-net, it's had a positive effect on our business, but we're closely monitoring those trends as we move forward. But again, Q4 is looking like Q3.

Great.

Yes, I might add, the early results of October are probably a bit better.

Yes, I'm talking about the average ticket size, but you're right, absolutely, October is better than September for sure.

On the last call, Mike, I think I understood you had a healthy processing pipeline on the CPX automated payables platform. I think you said it was about $30 billion plus that you were expecting to monetize this quarter. Is that plan still on target, or are you seeing a push back there into future quarters due to COVID resurgence?

Yes, with the large FI channel, we've seen a slight pushback, which was driving a lot of that. Yet, there is still— and Tom's closer to this than I— we've seen a pushback with the big FI, but we're picking up growth in other avenues.

Okay.

I would comment on it this way. The pipeline is still similarly sized, but as I noted in the last response, the bank pipeline tends to have a longer cycle to close. So we've dedicated our resources to smaller networks and when I say smaller, we're still discussing billions, but they offer better margins. Because we provide— these will be network partners where we are not just a payment provider but also the issuing solution. With banks, while we provide the payment engine, we're not always the issuer because the bank wants to be the issuer. So the volumes may be larger, but the margin offset makes them economically similar in terms of net revenue. Does that make sense?

It does. No that's helpful. Thanks again, Tom. Given the— turning toward strategic partnerships— and given the prior existing relationship with MRI and the turnkey nature of onboarding new accounts, do you have any update on any progress in terms of incremental penetration into the MRI customer base over the last two months since the acquisition beyond just the existing Priority customer base? Has there been any new growth into their customer base?

We closed the transaction at the end of September, so we're only a month into it. Right now, the early stages are devoted to ensuring the stability of the platform, the transition of our customers, etc. We're closely in touch with the group that now constitutes MRI payments, who are former employees of Priority. We have a fantastic relationship with them. I would anticipate a more realistic timeframe for driving penetration through MRI to begin in Q1 2021.

Okay.

And just to be clear, there are always new property managers joining the platform. The amazing thing about MRI is that it's an open architecture platform. The pipeline we had for cross onboarding wasn't disrupted during the transition with MRI. If that makes sense.

It does. And that's helpful. And then if you can elaborate on the progress for two of the other announced partnerships specifically Akerna and Citi and possibly elaborate on any progress those relationships have aided in expanding into the international arena, that would be helpful.

Both of those had some integration work to do. I would say the two, Citi and their properties for commercial are much closer to launch, whereas Akerna and MJ Freeway still have integration work that needs to be done by our technology partner as we start to roll that out. So the growth that you're seeing is independent of those integrated partnerships and pipeline opportunities committed to our future platform.

Okay. No, that's fair. And then when we look at the numbers that you put out and annualize them, looking at an $80 million plus EBITDA at today's quarterly run rate, are you still targeting an 80% conversion rate for free cash flows? And will that capital allocation be focused more on debt pay down? In the past, I know you've talked about doing more interesting tuck-in acquisitions in the healthcare space? Any color on that as well?

Mike, I'll let you comment on the free cash flow conversion. The answer to your question is, I would expect it to focus more on deleveraging. If we have a thoughtful deleveraging acquisition then we'll use the cash for that. If not, we'll use it for debt reduction.

Yes. At this point...

Or just debt repayment, I should say.

As far as EBITDA conversion, the free cash flow, we are obviously going to benefit from lower interest costs nicely. However, the downside of becoming profitable means we'll probably return to being a taxpayer, although we do have some carry forwards remaining to offset that. From a modeling perspective, I would keep that conversion at the targeted rate. We'll probably benefit more in the short term, but as we become a taxpayer, it will most likely revert back to that 80%.

Perfect. Well, I think I just wanted to start with a housekeeping question. There was a beta trial that you guys have been developing on a fully integrated omnichannel DLS. Is there any update on that or has that already been completed and launched?

Could you clarify? We have a number of point-of-sale tools, the core of which is our MX Merchant, which is omnichannel and has been in place for years. So is there something more specific you were referring to? Because we do have some product launches in the Priority Technology Holdings, particularly our Cumulus offering. Is that what you were referring to? Or was there something else?

It was related to the eTab offering.

Yes, that would be Cumulus, yes, yes. We're actively in beta and we're looking forward to an aggressive launch of that product in 2021. We want to ensure it's working seamlessly. It integrates well with eTab, handling curbside and even mobile on-premise transactions, allowing customers to scan a QR code or select a menu to order to their table. We're also adding a delivery module right now to the eTab component. We're excited about that for 2021.

Okay. But again, thanks.

Thank you. I appreciate your perspective.

Great. All right, well, great job, guys, and keep up the good work. Best wishes and looking forward to catching you next quarter. I'll jump back in queue then.

Thank you.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Tom for any closing remarks.

Well, certainly, we'd like to thank everyone for their attendance and for the support of Priority. We've tried to reflect over the past couple of quarters. We know the job at hand and we are laser-focused on driving results, and look forward to continuing to do so through the fourth quarter and having a great story to tell when we wrap up the year. So appreciate everyone and stay safe out there. Thank you very much.

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.