Good day, and thank you for standing by, and welcome to the Priority Technology Holdings' First Quarter 2021 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dave Faupel. Please go ahead.

Thank you, Dave, and thanks to everyone for joining us for our first quarter earnings call. I would like to begin this morning's call by providing a brief overview of our strong growth in Q1, and how we're positioning Priority for success for the remainder of 2021 and over the long term. I'll also provide an update on the Finxera acquisition and related debt financing in perpetual preferred investment from Ares Capital Management. Following Mike's financial review of our first quarter results and the improvement on our balance sheet, we would like to offer some perspective on our brief history as a public company, post Finxera financial metrics, and our positioning for the future. There are a few quick highlights I'd like to share upfront. As we outlined in our earnings release, the growth trajectory we've established with the pandemic last year continued in the first quarter of 2021. We met or exceeded forecast across key metrics including revenue, gross profit, and adjusted EBITDA. On a purely organic basis comparing our first quarter 2021 results with our first quarter 2020 results, which excludes the RentPayments business that was sold in September 2020. Revenue of $113.3 million increased 21.7%. Gross profit increased 16% to $31.4 million and adjusted EBITDA increased 37% to $18 million. These excellent financial results were underpinned by nearly 13% increase in total bankcard processing volume to $11.9 billion for the quarter, and approximately 8% year-over-year merchant growth in the Acquiring segment. A 2% outperformance to budget in commercial payments revenue, and a 17% outperformance in integrated partners EBITDA contributions. In conjunction with our strong financial results, we recently closed the refinancing of our existing debt, which reduces our interest expense by approximately $3 million per year. We also added a delayed-draw facility and perpetual preferred investment of up to $250 million from Ares Capital Management to help finance the pending Finxera acquisition and provide us dry powder for further acquisitions. With regards to the status of the Finxera closing, the key execution items are in place and the combination remains on track for Q3 to close. As noted previously, the financing for closing is locked down, and the regulatory process for the transfer of the money transmission licenses is progressing smoothly.

Thank you, Tom, and good morning. Yesterday's press release provides highlights of our first quarter 2021 results compared with first quarter 2020 on a GAAP basis. Those comparisons include first quarter 2020 results for the RentPayment business sold to MRI in September of last year. It also includes certain non-recurring expenses in both quarters as we describe in our press release. In order to provide comparability of ongoing business performance, my comments will focus on amounts that exclude RentPayment from the 2020 first quarter and excludes the non-recurring expenses from both quarters. This comparison of non-GAAP results is not a substitute for prominent comparisons under GAAP rather my comments are meant to be a complement to understanding the GAAP-based comparisons. Yesterday's press release provides reconciliations of GAAP to non-GAAP amounts and also provides details of the RentPayment first quarter 2020 results and the non-recurring expenses in both quarters. In the first quarter of 2021, consolidated revenue was $113.3 million, a 21.7% increase from $93.1 million in the 2020 quarter. During the first quarter of 2021, our diverse distribution channels continued strong new merchant boarding. Over 14,600 merchants were added with nearly 5,100 coming on board in March. Gross profit was $31.4 million, a 16% increase from $27 million in the 2020 quarter. Gross profit margin was 27.7%. We planned for Q1 margin reduction and our anticipated volume mix was a factor in that plan. Income from operations of $8.2 million was a 132.9% improvement over $3.5 million in the 2020 quarter. And as Tom mentioned, the adjusted EBITDA of $18 million increased 37% from $13.1 million in the 2020 quarter. Now let's break this down within the segments. Consumer payments revenue was $108.4 million, this is a 26% increase over $86 million in the 2020 quarter. Growth was driven by $9.7 million or 372% revenue growth from high margin specialized e-commerce merchants and $12.7 million or 15.2% revenue growth in our base consumer payments business. Merchant bankcard volume in this segment processed was $11.9 billion. This is a 14.3% increase over $10.4 billion in the 2020 quarter. Merchant bankcard transactions of $127.5 million increased 6.7% from $119.4 million in the 2020 quarter.

Thanks, Mike. As Mike shared, on the heels of an excellent finish to 2020, we had an extremely strong start to 2021. Despite the pandemic, 2020 will be regarded as Priority's year of transformation, and the realization of our mission to emerge as a payments powerhouse with a single platform to collect, store and send money that delivers differentiated products to our existing verticals. At the same time, we are well equipped to activate new solutions including payment facilitation into new market segments quickly and at scale. In the near term, you will see Priority roll out in-house settlement processing and international payments, both of which represent significant long-term growth opportunities. We recognize our plans are bold, but we have a platform and the personnel currently in place to execute. Now none of this would have been possible without the Priority team's focus and resilience. Shortly after Priority became a public company in 2018, payment network rule changes resulted in the temporary loss of over $100 million in annual revenue and $20 million in EBITDA. It was not easy, but the team managed through it and we are now on the other side with all signs pointing upward. Diligently focusing on delivering a differentiated product and service experience to our SMB acquiring clients and building out countercyclical payment segments in B2B, health care, mobile hospitality, and of course real estate. It enabled us to grow top line and bottom line results through 2020's COVID environment. Importantly, we proved out the differentiation of our payments operating platform with the successful monetization of the RentPayments asset at a 19x EBITDA multiple, which helped to reduce debt by over $120 million. As Mike highlighted in his financial remarks, Priority has continued to move from strength to strength in 2021. We are proud of our response to the challenges we overcame. We offer this perspective with the acknowledgment that the world of payments is moving fast with many smart competitors. Nevertheless, we certainly hope that our past performance managing through obstacles without ever losing sight of our clients' needs and building diversified sales channels like B2B and Integrated Partners demonstrate that Priority's built with intention, and is poised to be among the leaders powering commerce for businesses today and in the future. With each month that goes by the numbers reflect that our customers, reselling, and ISV partners and commercial marketplaces are seeing us as the go-to-platform for businesses to collect, store and send money in an easy and low friction manner. Taking a brief inventory of the power of our payments platform reveals why we are so well positioned for the future. On a single unified infrastructure for payments and banking, we operate the fifth largest non-bank merchant acquirer in U.S., a full service automated payables provider, and an array of integrated software platforms in several of the most critical and fast-moving segments of the economy including consumer finance, real estate, hospitality, and health care. These channels and our partners that today consistently board approximately 5,000 new merchant relationships each month, can leverage our direct payment connections into all card networks and the Federal Reserve. A full backend settlement capability is soon to be released. Payment facilitation and virtual account ledgering capabilities as well as commercial card-issuing. As we sit today on that technology platform, when including the Finxera acquisition and recent transactions in acquiring, run rate pro forma revenue is $520 million and pro forma EBITDA is approximately $135 million.

Great. Nice results. Can you comment on the lower e-commerce transaction volume during the March quarter that you said was planned, should we expect a return to the second half '20 mix or has something changed that will keep the mix of e-commerce and gross margin and the consumer payments business lower going forward?

Well, a couple of factors, Brian. So I would say we would expect the mix to be a little bit more weighted to card present just because of the fact that more of the economy is opening up, people becoming vaccinated are more comfortable and we're seeing very, very substantial growth in our retail trade segment, and that is mostly card present. Nevertheless, we do expect our e-com segment to re-establish its growth trajectory. We shut down some merchants that we did not feel were operating to the standard we would expect, and that is going to happen from time to time in this segment. So it was a factor we did expect as we knew we would see a bit of compression from the pairing of those merchants but felt like that would put us ahead of the game long term as a risk mitigation with some transaction activity that had some unfavorable markers when we look at it from a regulatory standpoint.

And so to that end, pre-Finxera acquisition the margins will be in the high 20s as a result of both of those dynamics, is that how we should think about it?

I would say in that neighborhood. Mike, I don't know if you would voice it differently, but I would offer this to you from a modeling standpoint that would be a conservative view that can only improve.

Yes, I would agree with that. However, bankcard volume in specialized merchants increased in the first quarter compared to the fourth quarter of last year. This follows the trend we had observed in earlier quarters, but card volume with those merchants is just one factor influencing revenue. Nevertheless, we did see growth. I can follow up with you to understand why you believe there was a decline in total volume.

Okay. Regarding the CPX B2B payables technology, what do you see as the catalyst for accelerating revenue growth? You mentioned some significant percentage increases in sales, but the total dollar amounts seem to have only increased slightly, so I might be missing why CPX revenue growth is so modest. Is it a matter of needing more salespeople, further development, longer sales cycles, or perhaps issues with revenue recognition? Could you provide some insights on what might drive the acceleration of that platform?

Yes, the volume growth in those channels is ongoing, and the pipeline is looking very strong. The reason we didn't see a corresponding increase in revenue growth in Q1 compared to last year is due to one of our customers, who was previously priced very high, now being repriced to align more closely with the market and our other customers. This single customer had significant volume, which dampened the overall growth we experienced. However, the momentum remains strong, which is why I mentioned the quarter-over-quarter volume growth and the building pipeline.

I would like to expand on that point. Regarding the distribution, our previous pipeline was mainly focused on the financial institution community, which did not launch anything during the pandemic due to a lack of personnel. We quickly adapted, and our sales initiatives are now aimed at direct-to-customer and independent software vendors. We are very confident in the pipeline that is either in contract negotiation or has been contracted but has yet to launch.

Great. Last question and I'll get back in the queue with some others. While the Finxera acquisition hasn't closed you talked about you're going through preparations, have you begun to approach customers about the new banking offering that can be obviously cross-sold, and if so can you just talk about the response and how that's being accepted with your customer base?

Yes, I appreciate the question. The response has been fantastic. We are already discussing with our existing customers how to implement payment facilitation into their platforms with current ISVs. We've established new channels with companies in the money-sending business, which are finding our platform to be much more efficient. We consolidate multiple banking connections into one that connects directly to the Fed, allowing them to deploy to their endpoints more efficiently. Those are just a couple of examples. We also mentioned earlier that we would be penetrating the real estate space more deeply, and that is happening. We are prepared to launch that solution with our MRI relationship and will soon work on an adjacent solution to manage deposit accounts for security deposits, etc., in that sector. Our team is already outlining and collaborating on the roadmap. This is just the beginning. We have customer-driven projects across the board in acquiring and commercial sectors that are combining our payment solution with virtual banking or electronic wallets. We intended to hit the ground running, and that has indeed occurred.

First question, can you just provide some additional comments on the supplier enablement product that you guys talked to in the B2B business where you said it would generate about $4 million in annual revenue, which should be substantial in the commercial payments business kind of if you talked to customers what their feedback has been and cadence of rollouts that we can expect over the rest of the year?

Sure. We have a significant partnership with American Express, and they approached us to implement a supplier enablement initiative. This involves collaborating with their merchants to enable them to use American Express cards for specific payables. When we refer to supplier enablement, we mean facilitating the use of Amex cards by suppliers and merchants for bill payments. This program is currently in the early stages, and we are in the process of hiring the necessary personnel to support its launch. We anticipate seeing the results starting in Q2, and once fully operational, we estimate it will generate approximately $4 million in annual revenue.

And maybe to put a fine point on it, it's contracted. The heads are contracted. We are just filling the seats with salespeople, and that is moving at the pace of our expectations. So we just keep those seats filled, and the revenue will be spot on with the $4 million that Mike referenced. We actually are optimistic that, that will grow from there, which has historically been the case and that's also what's sort of been kind of voiced over to us that we'll get this first phase off the ground, and then we can grow from there based on results.

Great. That was very helpful. For the second question, could you provide an update on the progress of onboarding the former RentPayment clients onto MRI? I know you've been doing well, particularly in the last quarter. Can you also share the revenue contribution from that in the quarter?

Yes, that was $700,000 of revenue in the quarter. And I don't have specific numbers on penetrating MRI's existing customer base, but it's a 10-fold opportunity. We've been up until this day focused on the renters that were our customers, but we will be moving into expanding that internationally over the coming quarters.

The transaction closed in September, and we really began working on it in October after everyone settled into their roles at MRI. We are in the process of migrating all of the existing platform, which we expect to complete by around June or July. After that, we will aggressively pursue the remaining opportunities. At the time of the transaction, we had approximately 1 million renters accessing rentpayment.com, which has been growing by about 20% to 25% annually. At that time, MRI's platform had 12.5 million renters. We will fully initiate this effort during the summer months.

Great. Yes, that's a very exciting opportunity. Another question for me, kind of piggybacking off the first question. So you guys have seen positive trends that you said in card-not-present transactions despite the little blip in dropping some e-commerce customers this quarter's strong momentum in e-commerce, but gross margins were down pretty substantially, so were there any kind of one-time items in there or something that will not be reoccurring so we can expect to see you guys rebound to over 30% gross margins?

Mike, I'll let you weigh in.

Yes, that's fine. You need to consider our margins without the RentPayment for comparison. Since that was a high margin revenue for us, it contributed positively to our margin percentage. Looking at the pro forma for the first quarter regarding our new priorities with Finxera, we are approaching 40% gross profit margins on a pro forma basis. On an organic basis, our margins are in the upper 20s for this quarter, but once we incorporate Finxera and their historical business, we are nearing 40% overall. As we continue to grow and utilize that technology, it also represents a high margin business.

Congratulations on a great quarter. Tom, it’s encouraging to see progress with Finxera. I’m curious if you could elaborate on the potential synergy opportunities for the company and what those contributions might look like, keeping in mind that they are not included in your pro forma outlook.

Let me discuss the distinction between expenses and revenue. The expense synergies we're targeting are quite clear, especially regarding SG&A. We're confident about achieving them, and this won't involve layoffs due to the acquisition. Instead, we are eliminating some planned hires because these roles can be filled by Finxera technologists. Additionally, we have already secured some reductions in management costs and are combining various SG&A expenses like auditing, legal fees, and insurance. We are on track to realize $5 million in expense synergies, as projected. However, in our pro forma arrangements and what we've presented to the market, we haven't factored in any revenue synergies. For instance, a critical aspect for small businesses is cash flow acceleration. Square Cash's Cash App charges 1% for accelerated cash access. Some banks offer same-day funding for a fee of $20 a month. If we achieve just a 10% penetration rate among our 200,000+ merchants for instant funding linked to their merchant accounts, at $20 each, it translates to an additional $5 million in synergies. Furthermore, if we earn even a modest 50 basis points on those funds, that's another $5 million. These are tangible opportunities that arise when we merge these technologies in one of our major sectors focusing on accelerated funding for small businesses. The average yearly cost of insufficient funds or bounced checks for small businesses is around $400. Therefore, enhancing funding options holds significant value for them. We believe that our penetration rate could exceed 10%, but we prefer to ensure we have accurate statistics before making any bold claims. Additionally, we could offer merchants a PriorityOne debit card for their accounts, allowing them to pay suppliers or manage automated payables with CPX, and earn cash back through virtual card payments. All of these products contribute to creating a comprehensive solution for small business banking and payments, reflecting the market's direction, where we already have a network of 225,000 small businesses established. We're thrilled about the potential this merger brings to our small merchants and entrepreneurs. To provide another example, the B2B market shows immense demand, evidenced by REPAY's recent acquisition of BillingTree for a high multiple. We have a robust technology stack for automated payables, and our current valuation is much lower than where it should be, especially given this segment's high multiples. Our streamlined process allows suppliers to join the Priority network without needing card acceptance accounts; they can simply use a digital wallet for payments. Although I can't predict the exact revenue effects, it's clear that we’re establishing a low-friction experience for suppliers within our network. This reflects our thoughts on how these tools will perform, and I hope it clarifies some potential revenue opportunities. But to be clear, we haven't included these in our current pro forma analysis; we're concentrating only on steady-state business performance.

And I'd just add to that, just to be clear, that in that pro forma we also did not add in any of those expense synergies either.

Okay. That's great. Appreciate that color. I mean just sort of a quick follow-up. The 5,000 plus merchants that you've onboarded in March, can you talk a little bit about some color around those verticals or anything that sort of stands out to you in terms of that onboarding process? And again, congrats on the quarter.

Yes. It's a consistent issue that affects all areas of onboarding. We're continuously engaging with all our vertical markets, and there's nothing out of the ordinary. It's just part of our regular rhythm at that level. We highlighted March specifically because it was the strongest month of the quarter, but the trend is consistent across the board.

Yes, George, to provide some detail, I apologize for not realizing I was on mute, so thank you for stepping in, Mike. If you look at our overall performance, we're in the mid-teens, with legal services in the high teens, hospitality around 7 to 8 percent, health care and health care providers similarly positioned, and the salon space and wholesale trade making up about 10 to 12 percent. The onboarding has been consistent with these trends. We have a very diverse set of sales channels, and collectively they tend to produce stable results, with little volatility over the past few years. The one area that stands out, as you already know, is in specialized acquiring and the e-commerce segments, which have a higher compliance requirement, and we have unique tools that make us very effective in those areas. This segment continues to grow at a rate exceeding what we experienced in 2018.

One follow-up regarding the increase in merchants onboarded: with inflation leading to rising prices on goods and services, is there any reason to believe that we won't see consumer growth in June compared to the March quarter, especially considering what we've observed in the first half of the second quarter?

Certainly, there is nothing concerning at this time. We feel very confident about the current trends we have established. Looking back at early 2020, we believed that our ability to continue selling during the COVID period would drive growth as demand increased. We are still achieving results at a strong pace, often exceeding our usual rates in many months.

Yes. Two quick follow-ups from me. So first, congrats on completing the refinancing in the preferred issuance, I know you guys have $50 million preferred that's available for an additional acquisition, you guys have some dry powder from the refi, can you just talk about what you're seeing in the market and if there is anything specific you're looking for in a potential acquisition?

I would say nothing has changed regarding the segments we've been focused on for the past few years. We have a strong presence, particularly in the down market area of the acquiring space. When smaller ISOs and resellers are looking to monetize their businesses, we are certainly one of the options they consider. We see ongoing opportunities there. I don't see anything on the horizon that could be considered transformational in the acquiring space. We're directing more of our attention to Finxera, which is a good example of our strong acquiring business that is well-positioned to succeed. We're particularly interested in opportunities to acquire countercyclical assets with technology that enhances our core offerings, especially in verticalized strategies like real estate, Finxera, consumer finance, and CFTPay. We'll also keep an eye on the B2B space for the right opportunities that match our profile. That's where our greatest interest lies as it complements our acquiring business, which we believe can grow organically. I should mention that we are disciplined in our acquisition strategy. For example, with the MRI transaction and what we did with the RentPayment asset, we secured those in a favorable structure for Priority at less than 10 times EBITDA and were able to reposition them for an exit at 19 times EBITDA. We will continue looking for opportunities to integrate assets and consolidate them into our existing verticals. While we won't overpay for assets, we could look at other industry dynamics, like Deluxe's purchase of First American Payment Systems at 17.5 times EBITDA or the REPAY transaction I mentioned earlier. We believe our organically built businesses come with much better costs, and we want to maintain that approach as the key to long-term success. I want to emphasize that I'm personally invested for the long term. We see this as a significant opportunity in payments with a long runway ahead. The payments industry is the third largest on the planet, which I think is often overlooked. There are many ways to succeed here, and while we recognize the presence of more sophisticated players in the market, we feel confident about our position and how we can leverage the infrastructure we've developed to become a payments powerhouse and a significant force as we continue this journey.

Really appreciate the detail there. And last, if I may, just kind of housekeeping. On the Finxera color you guys offered an annual guide of $450 million to $470 million in revenue and $70 million to $80 million in EBITDA on the full year and it looks like you guys are going to meet those numbers organically and then you touched on the pro forma numbers for Finxera, just an extra added bonus, so I just want to make sure you guys are still comfortable with those numbers with the organic growth?

We exceeded our plan in Q1, so it just gives us greater comfort on those organic numbers that we put out.

Well, I just want to once again thank everyone for the time and certainly the line of questioning to understand not just the quarter but where our business is headed and we appreciate everyone's support in that mission. I hope everyone has a great remainder of the week and weekend, and thank you once again. Take care, everyone.

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