Priority Technology Holdings, Inc. Q4 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to the Priority Technology Holdings’ Fourth Quarter 2020 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. I would now like to hand the conference to your speaker today, Dave Faupel. Please go ahead, sir.

Thank you, Victor. Good morning and thank you everyone for joining us. I’m Dave Faupel, the Chief Marketing Officer here at Priority Technology Holdings. And with me on the call today are Tom Priore, our Chairman and Chief Executive Officer; and Mike Vollkommer, our 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, which involve 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 in our press release and SEC filings available in the Investors section of our website. With that, I’d like to turn the call over to our Chairman and CEO, Tom Priore.

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 the discussion of the acquisition of Finxera 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 a 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 counter-cyclical 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 was $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 Finxera Holdings, a pioneer in the fintech industry and a company that launched and operated one of the first Banking as a Service platforms. This 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 for our software partners, SMB and enterprise merchants, and our integrated partner businesses and vertical software applications. CFTPay, Finxera’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 partner’s 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 Finxera’s nationwide money transmission licenses are complete in the next six to nine months. I’d now like to hand it over to Mike Vollkommer 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 GAAP basis. It also provides very relevant highlights of the results on a more comparable basis that exclude the RentPayment asset sold on September 22, 2020. So my fourth quarter comments will focus on amounts excluding RentPayment in the 2019 fourth quarter 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 GAAP results with the results excluding RentPayment. I’d also like to point out that the attachments to our March 10 press release provide the 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 December being 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% increased 84 basis points from 29.8% in the 2019 quarter. Income from operations of $6.2 million was a 354% 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. Adjusted EBITDA of $18.3 million increased 35.2% from $13.6 million in the 2019 quarter. 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 bankcard volume. Merchant bankcard volume processed was $11.1 billion compared with $10.8 billion in the 2019 quarter. Merchant bankcard transactions of $120.3 million declined 6.8% from $129.2 million in the 2019 quarter. However, the average ticket of $91.99 grew 10.5% from $83.24 in the prior year quarter. This 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, spending trends resulting 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 to Priority than swiped 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 from a reduction of contingent consideration. The 2019 quarter included a $0.6 million benefit from the reduction of contingent consideration, and these non-recurring items are detailed on Page 5 of yesterday’s press release for your reference. Commercial payments revenue was $3.9 million, a $2.6 million decrease from $6.5 million in the 2019 quarter, due largely to the 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 loss 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 was $1.5 million. This is a $0.8 million increase from $0.7 million in the 2019 quarter. 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. Hospitality eTab products revenue and profits are reflected within the Integrated Partners segment; the sales made by the Hospitality team within consumer to sales made by that channel. This reporting under reflects the tremendous growth we’ve been incurring within eTab since its introduction. Across both channels, fourth quarter volume grew 327% with transactions up 251%. Total revenue approaches $400,000 in the fourth quarter of 2020 across all channels. This growth has carried into 2021 as eTab continues to gain wider acceptance among our Hospitality merchants. We’re also seeing similar acceptance momentum within our PayRight 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 that compares with non-recurring expenses of $3.2 million in the 2019 quarter. Now let’s move on and review our significantly improved liquidity position. 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. Our total net leverage ratio was reduced to 5.85 times. Our cash position was $9.2 million at December 31 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 also significantly decrease mandatory debt amortization by 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 10 press release. This guidance does not include any increases related to the acquisition of Finxera, which is expected to close in six to nine months. Revenue is expected to range between $450 million to $470 million, a growth of 15% to 20% above 2020 revenue of $392 million, excluding RentPayment. Adjusted EBITDA is expected to range between $76 million to $80 million, a growth of 22% to 29% above 2020 adjusted EBITDA of $62.1 million, excluding RentPayment. The strength we’re experiencing so far in the 2021 first quarter bodes very well for achieving these earnings objectives. 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; 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 RentPayment and Finxera 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 operations 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.

Our first question will come from the line of Brian Kinstlinger 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 as strong as 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?

Yes. We don’t really experience seasonality in that business. What’s delayed some of the growth trajectory that we had in our pipeline has really just been COVID-related and the way banks responded to COVID. The good news is they’re recognizing that true automated payables is a much more important element of their commercial card platforms. And we’re just now seeing the benefit of that momentum picking up.

Yes. So we’re asking broader on the seasonality, but to my point, another question I had was on CPX revenue, which is flatline throughout 2020. 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?

Yes, sure. So actually volume is up considerably. It’s really just a change in margin mix. 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 pickup. 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 those bank segments.

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 those merchants?

Just to be clear, those are on the acquiring side. We’ve kind of steadily maintained that rate. December’s normally a little bit below just because it’s the holiday season. So we’ll see boarding drop off, but the trend in that level of boarding through even through COVID and as the economy recovered has been very consistent and it remains so in the early part of 2021.

Okay. Thank you.

Yes, absolutely. 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, we do not need to make any additional investment in that business as it scales. It’s been built with intention, it’s been built with purpose. We’re poised for the momentum we already see in the pipeline and we don’t need to make additional investments to convert it.

Our next question will come from the line of George Mihalos from Cowen. You may begin.

Hey guys. Good afternoon. Thanks for taking my question. 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-comm business?

Sure. From a card-not-present transaction perspective, we see the consumer behavior probably holding. As volume grows with the reopening, particularly in the Northeast and restaurants, people going to restaurants, yes, there will be volume coming on that’s card-present. But a lot of what’s built into the fabric of people’s behaviors from a card-not-present activity we don’t see that retracting. We’re forecasting a more conservative growth than obviously we had in 2020. But 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 than it has been in 2020.

Understood. That’s obviously just for comparison issues, given the strength that you saw in 2020, right? It sounds like you’re still entirely encouraged by what you’re seeing.

Absolutely, yes.

Okay, great. And just last question for me, maybe to ask the prior question a little differently. The $450 million to $470 million of revenue that you’re contemplating for 2021, 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.

Yes. We’ve been growing; comparative quarter has been a little difficult this year, right. Because I think you’re going to see really exceptional growth in Q2, last year it was flat year-over-year, even though we grew EBITDA. So Q2 this year is going to be over 30% we think. But the other quarters are in the teens, the mid-teens kind of consistent with what we’ve been seeing this year.

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

Appreciate the color. Thank you.

Our next question will come from Andrew Scutt from ROTH Capital. You may begin.

Hey, good morning. Congrats on the quarter. First question is just on guidance; I believe you said revenue and EBITDA does not account for the impact of the Finxera acquisition. I was just wondering, does that include EBITDA integration or ramp-up costs?

We’ve not included in that projection any synergies. We know that there is a meaningful amount there. The platforms are very complementary. Even the cost of achieving some of the synergies, which amount to contract consolidation, expenses, things like that, which we’ve already examined, are less than $250,000.

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

As it relates to your first question, areas where we had seen lift throughout the year include wholesale trades. Plumbing, electrical, landscaping—those types of businesses are moving to digital transactions. That transition has been in motion, and we see that continuing; that will certainly be an area of lift. From a volume perspective, the overall hospitality space, which includes salons, is down relative to its historical norm, but from the heights of COVID, we see a tremendous rebound. Nevertheless, it’s still flattish to down versus prior years, but that decline is more in the single digits. We’ve modeled an expectation that we’ll kind of stay in this steady state until we see a bump as people just get back out in greater numbers. The good news is those segments because they are 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. Hopefully, that answers your question. I apologize for the follow-up. Would you mind repeating it?

Yes, no problem. And that answer was very helpful, so I appreciate it. The second one was just with the two rounds of stimulus checks having come out, do you guys see any kind of incremental upside there or any possibility of that?

I’ll ask Mike to comment. We haven’t modeled in any expectation that the stimulus will have a meaningful impact on spending trends. We think, particularly with the addition of Finxera, we expect the counter-cyclical segments that Finxera operates will do quite well, while we begin to inject their technology into our existing business lines for integrated payments. So we feel like our platform is 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. Mike, anything you would add?

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

Yes. Maybe if it does, it would just be upside to our current case.

Thank you. I’m not showing any further questions in the queue. I would like to turn the call back over to Tom Priore for any closing remarks.

Thank you very much operator. I would like to thank everyone for their interest in our business and for participating in the call today. 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.