Good morning, ladies and gentlemen, thank you for standing by. And welcome to Priority Technology First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please follow the operator's instructions. I would now like to hand the conference over to your speaker host, Chris Kettmann. Please go ahead, 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, 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 would like to turn the call over to our Chairman and CEO, Tom Priore.

Thank you, Chris. And thanks to everyone for joining us for our first quarter 2022 earnings call. As you saw in our earnings release, we once again reported exceptional results for the quarter, rapidly growing both our top and bottom line during the period. For the second quarter in a row, we saw total quarterly revenue increase by more than 35% from the prior year to a record $153 million in Q1. Our strong top line results drove roughly a 65% increase in gross profit to $51.8 million and a 68% improvement in adjusted EBITDA to $30.3 million. These results were underpinned by a 610 basis point expansion in gross margin to 33.8%, despite the drag from the reduction in our specialized merchant acquiring segment noted in previous earnings calls. Importantly, when adjusted for the acquisition of Finxera and the risk pairing of our specialized acquiring segment, our revenue grew organically by 30.9% and adjusted EBITDA grew by 63.5% for the quarter. Our strong growth and profitable trends have continued through the second quarter as well. Mike will go into the segment level detail on our first quarter results shortly. Before he does that, let's look at Slide 5 and some of the company's performance statistics. As we've previously highlighted, our native platform efficiently serves the SMB, B2B and enterprise payment markets at scale, supporting over 245,000 active merchant accounts, more than 360,000 active bank deposit accounts and processing total annual payment volume of over $90 billion with roughly 88% derived from integrated software products. With our strong foundation and robust pipeline of business, we remain confident in our ability to generate revenue between $650 million to $665 million, and EBITDA of $145 million to $150 million that we've projected for 2022. As Slide 6 summarizes, our native technology core has been purpose-built to collect, store and send money by combining robust payment functionality with Banking-as-a-Service capability in a single offering to monetize the merchant networks we serve. Leveraging our Priority Passport Platform, we're poised to deliver a full suite of proprietary payment and banking solutions into the SMB and B2B markets and provide enterprise partners the ability to embed payments and banking features into their core offerings to monetize their payment networks. Ongoing market adoption of each of these three business segments has contributed to our increasingly strong overall results, as well as our continued confidence in our 2022 outlook. Our largest segment SMB payments continues to outperform peers, reporting year-over-year bank card volume growth of 18.5% and revenue growth of 19.2% in Q1. To help demonstrate SMB’s outperformance in the industry, we've included the growth rates of the top five non-bank merchant acquirers in the U.S. As you can see, priorities growing at multiples of its closest peers, as our results illustrate our acquiring product and service offering resonates with SMBs and consistently wins in the marketplace. Our fast-growing B2B payment segment once again reported an exceptional quarter as it continued to add new partner channels on the strength of our CPX product. We expect that recently announced partnerships with SYSPRO, a leading ERP for manufacturing and distribution industries with over 15,000 licensed companies globally and representing over $60 billion of addressable AP spend, Premier Healthcare, a $70 billion healthcare GPO marketplace serving over 4,000 hospitals and 225,000 providers, Tri-County Bank with $10 billion in assets serving customers in Central and Southern California, and Century Bank serving the New Mexico and Texas markets with $4.6 billion in assets will add valuable transaction volume in the coming months, to complement our growing middle market customer base. CPX will provide these customers with a seamless suite of automated payable solutions, delivering the benefits of automation, revenue creation, and enhanced product experience. For the quarter, our B2B segment delivered year-over-year revenue growth of 68.6% in Q1 and operating income increased by $800,000. In addition to the partnerships I’ve mentioned, our currently contracted pipeline sits at $610 million, positioning the business to deliver consistent winning results. Lastly, our Enterprise Payments segment, which provides embedded payments and banking solutions to monetize legacy platforms and accelerate software partners' strategies to monetize payments, reported year-over-year revenue growth of $16.7 million in Q1 and a $5.2 million increase in operating income. Enterprise Payments is currently supporting over 20 active integrations managing over 360,000 deposit accounts and over $0.5 billion in deposits. Our Enterprise segment is consistently piling up integration wins in sectors like real estate and construction technology, treasury software systems, and legacy payment operating platforms. At this point, I’d like to hand it over to Mike who will provide further insight into our performance during the quarter along with trends in each business segment.

Thank you, Tom, and good morning. As I review the segment level contribution to our consolidated results, please refer to the supplemental slides for the details on the numbers. SMB Payments revenue of $130 million increased 19.2%, driven by bank card dollar volume growth of 18.5%, 14.4% growth in transactions and 3.6% growth in average ticket. Average merchant count of 243,383 in the first quarter 2022 grew 7.3% over the first quarter 2021. Merchant boarding trends were strong, with new monthly merchant boards averaging 4,675 in the quarter. Our historical monthly averages range from 4,300 to 5,000. B2B Payments revenue of $5.9 million increased 68.6%, driven by the revenue momentum that began to build in the second half of last year. In Managed Services, increased program activity drove a 44.4% growth rate. In CPX, new customer additions, strong volume increases within existing customers, and a minimum revenue recovery from a 2020 contract termination drove a 94.1% growth rate. The growth rate was 41.2% excluding that recovery. Enterprise Payments revenue increased from $0.7 million to $17.4 million, a growth of $16.7 million, driven by CFTPay which was acquired in September 2021. Gross profit of $51.8 million increased by 65%. SMB gross profit of $32.9 million increased 12.7%, despite headwinds from the expected decline of $5.5 million in specialized merchant acquiring. As we’ve mentioned in the past two earnings calls, declines in specialized merchant acquiring are due to the temporary pullback from mid-year 2021 risk pairing actions. This is rebounding according to our plan and it’s expected to return to year-over-year growth in the third and fourth quarters leading to more than 15% growth in full year 2022 over 2021. B2B gross profit of $3.2 million increased 60%, with 63.3% growth in CPX and 48.6% growth in Managed Services. Enterprise gross profit of $15.7 million increased $15.5 million from $0.2 million. Gross profit margin of 33.8% increased 610 basis points from 27.7%. The results of Enterprise drove the overall margin expansion, overcoming the decline in SMB that resulted from comparative Q1 results in specialized merchant acquiring. Other operating expenses of $40.9 million increased 52%. Salaries and benefits of $16.1 million increased 67.8%, driven by the CFTPay acquisition, headcount growth, and higher non-cash stock-based compensation. The growth in salaries and benefits included a $1 million increase in stock-based compensation. SG&A of $7.5 million decreased from $8.3 million. There were $4.1 million of non-recurring expenses in Q1 2021 compared with $0.5 million in Q1 2022. The growth in recurring SG&A is largely the result of a significant increase in the size of the company. Depreciation and amortization of $17.4 million increased $8.3 million from $9.1 million, driven by the 2021 acquisitions. Operating income of $10.8 million increased 140%. SMB operating income of $11.8 million decreased $0.8 million due primarily to the temporary gross profit decline of $5.5 million in Specialized Merchant Acquiring. Excluding this decline, SMB operating income increased $4.7 million. B2B operating income improved by $0.8 million from a loss of $0.4 million in Q1 2021, reflecting the higher gross profit. Enterprise operating income of $4.5 million increased $4.3 million from $0.2 million in Q1 2021, driven by the September 2021 acquisition. Corporate expense of $6.6 million decreased by $1.9 million, driven by $3.6 million lower non-recurring expenses, partially offset by the growth in headcount, non-cash stock-based compensation, and other administrative expenses. Adjusted EBITDA of $30.3 million increased 68.3%, meeting our plan for the quarter. Interest expense of $11.5 million increased $2.3 million. Higher debt levels driven by our 2021 acquisition financing were only partially offset by lower borrowing rates. Total debt of $625.4 million at March 31, 2022 decreased by $6.5 million from $631.9 million at December 31, 2021. The decline is the result of a $1.5 million scheduled amortization payment and a $5 million revolver repayment. In April, we continued to reduce the revolver with an additional $4 million repayment. Since the end of Q3 2021, we have reduced debt by $27.1 million, with a total of $3.1 million scheduled amortization payments and $24 million repaid under the revolver. Our $30 million revolving credit facility currently has $6 million outstanding. We are well below our total net leverage ratio covenant of 6.5 times, with a total net leverage ratio of 4.55 times at March 31. We will continue to apply free cash flow to reduce debt and reduce leverage. Senior preferred stock on our balance sheet of $215.1 million at March 31, 2022 is net of $22.7 million of unaccreted discounts and issuance costs. The first quarter preferred dividend of $7.6 million is comprised of $3.5 million of cash and $4.1 million of PIK, and is supplemented on our income statement with the accretion of discounts and issuance costs of $0.8 million. I’ll now turn the call back over to Tom.

Thank you, Mike. On Slide 20, we’ve laid out several of the metrics we use to measure the business, which we hope you appreciate. Priority has been built with intention and has managed with precision. The numbers, particularly our results for the economic turbulence of the past few years, bear out the success of our model and the grit of our organization. Recently, I’ve been reading a book by Angela Duckworth that was given to me by a friend in the business. That seeks to define grit. At its most basic, grit is the ability to sustain unyielding effort for a long period of time. But I think we can all appreciate grit. It’s tough to predict; it’s challenging to develop. But we all know it when we see it. At the book's foundation, Duckworth presents a very elegant formula: Skill is a result of talent multiplied by effort, and achievement is a result of that skill multiplied by effort. This is the core of grit. Well, noticeably, at every step of the formula to develop grit is effort. I would submit that the core of Priority’s consistently strong financial results, regardless of the economic environment, our strengthening operating efficiency reflected on our profit margins, and free cash flow, and the steady sales results of our market-leading product offering is our company’s grit. Use the results of a highly talented group, never resting on past success, persistently honing their skills and focusing those skills with intense effort to drive achievement. So, be assured, the grit is being ingrained into the DNA of Priority. It’s being embraced by our teams, and we’re confident it will translate into long-term shareholder value. We appreciate your time to participate in today’s call and the ongoing support of our investors, and look forward to continuing to deliver outstanding results. Operator, we’d like to now open the call for questions.

Thank you. Our first question comes from Steve Moss from B. Riley Securities. Your line is open.

Good morning, guys. Nice quarter here. Maybe just starting with the outlook here, you guys continue to add partners and made another announcement in the past month here. I realize these contracts are larger, and I'm kind of curious about the timeline for additions and if we could see some upward bias to the guidance here as the year progresses.

Yes. Thanks, Steve. We’re already working those channels. Leads are being delivered from our partners to our sales teams, and we’re actively working those customers for adoption of CPX. We feel confident that we’ll see upside in this segment as those partnerships start to monetize. As they begin to convert, we’ll start to reflect that as we get a better handle on the pace of conversion of those merchants and the take rate we’ll be able to derive from those contracts.

Okay. That’s helpful. And then just in terms of the drivers of average ticket size going forward. Definitely continue to see an increase there. Just kind of wondering how much is that just customer mix versus maybe the inflationary environment we’re seeing these days.

From our vantage point, it’s more the inflation rate that’s driving the increase. The mix within our book has not really shifted.

Okay.

I would submit this always; we’ve got a lot of rent payments that are starting to migrate over to our platform. As I mentioned, we’re hitting our stride in the real estate space, particularly with the passport product, and those will be – you’re talking about large tickets there with the average rent ranging from $1,200 to $1,500. So there’ll be some upward pressure there, but again, we’ll get a better gauge of that as we start to see conversion.

Okay. And then just maybe one on expenses here. I hear you guys on the comments in terms of companies growing. So that’s a large step up in operating expenses. Maybe just any incremental color just on compensation here, is that kind of a good run rate going forward?

At the beginning of April, we did adjust folks' salaries, and that was average across the board, probably around 3.5%. So that will bleed into the coming quarters. Other than that, it’s just the headcount growth from the acquisitions that’s driving the increase.

Yes. And I would just offer this to you, Steve, we’ve budgeted for greater headcount growth than we’re experiencing. We are seeing greater efficiency with our teams in accomplishing the build that we want. So we would expect that our headcount growth budget will be below our budgeted levels.

Yes. The headcount plan is conservative for that reason. And that pay increase, I just cited, was factored into our plan and our guidance.

Okay, great. Thank you very much. I appreciate all the color.

Thank you, Steve.

Our next question comes from the line of Brian Kinstlinger of Alliance Global. Your line is open.

Hi, great guys. Thanks. Nice results. First, obviously, there are many who predict a recession. So what’s the impact you guys see generally of a recession on each of your three segments? And is this scenario in any way contemplated in your guidance?

It is actually, we’ll refer you back to comments we made more than a year ago about our expectations of a changing economic environment and how we were building countercyclical businesses in preparation for what we saw as just a turn in the business cycle. B2B is one segment that benefits from that. It’s a means by which businesses gain financing for payment to their supply chain. They're using tools that enable them to use cards and digital strategies for a funding mechanism. Also, everyone's tightening the belt. So automation that enables them to redeploy staff or even eliminate headcount is important, and B2B is a segment where those benefits are clear. We expect to see continued growth as these tools get adopted by businesses globally. In addition to that, we have a market-leading product that supports folks in the debt resolution arena, and we're seeing excellent growth in that segment as consumers start to exhibit stress and are enrolling in programs where we are the administrator of their funds to help them resolve debt. So we expect, in a more challenging economy, that we will continue to see strong growth in that segment. The other benefit, of course, is because we have money transmission licenses, we are able to maintain those deposits and direct them to banks of our choosing. We benefit from increases in rates. Our assumptions in our budget and our guidance were very conservative in the inflation environment that would lead to increases in rates and what additional money we would earn from the float on those deposits that we maintain, and the growth in the trajectory of consumers adopting our escrow and administrative services to help them resolve outstanding debts. Those are two sectors in particular. The other where we're winning very consistently is the rent in the real estate space. You're seeing a lot more folks put rent on card because it's a means of temporarily financing their rent while their paycheck is coming in every two weeks. So we're seeing growth there. We built those businesses recognizing that our core acquiring just has natural exposure to the general economy. Our goal has been to win market share to offset potential drops in consumer spend. And we're doing that. You can see that from the growing merchant base and drive additional volume on that platform, which we're achieving. We've got our countercyclical segments that perform very consistently in more challenging economic environments. It's still early days in that conversion, particularly B2B. Over 50% of all payments in that arena, which is $18 trillion in the U.S., are still resolved with checks. We just need to get people to convert from an old method of payment to a more modern one. We're doing that pretty consistently these days.

Great. Follow up on the expense side. First, I wanted to touch on the gross margin. You highlighted in the consumer SMB side. Was there a further step down in SMA revenue during the first quarter compared to the fourth quarter in 2021 because the gross margin really dropped sequentially? My question is when do you get back to the 26% to 27% range for that business? Is that the third quarter? Is that what I heard?

Yes. First of all, we had revenue growth in Q1 that was over 44% higher than Q4 of last year. That’s just the rebound that we're talking about, the reboarding of merchants. We will switch over to year-over-year growth in the third quarter and the fourth quarter, leading to full year growth conservatively speaking of over 15% this year versus 2021.

So the lower gross margin was the fact that SMA this quarter was much lower than the fourth quarter; is that right?

No, there was SMA growth in Q1 over Q4. Just so we can make sure we're answering the right question, Brian is what saying that…

Why is the gross margin down so much sequentially is the question.

Between Q4 and Q1?

Yes.

In the SMB segment, is that what you're asking?

Exactly. Yes. Thank you. Sorry for being so bad at articulating today.

Not at all. Not at all. In Q4, we had some annual billings that happen each fourth quarter, which leads to a little bit of a pop in the fourth quarter versus the first quarter. I can reconcile that and be more specific for you, but that is what jumps to mind.

Okay. You have one more quarter of low SMB gross margin before it seems to fully recover; is that right?

Yes. I guess what we're – we can take this offline, Brian. That's not what we're actually seeing. So there may be some anomaly you're looking at.

No, I was just looking at these first three quarters of last year; SMB was 26% to 27% gross margin. Then it was 25%. Now it’s 22%. So I’m curious when you'll get back to that 26% to 27% range.

I think what you’re seeing, Brian, where you will see it normalized is that specialized margin is high margin.

Okay.

When you couple that with annual billings for things like PCI or annual fees that hit in December, the quarter-over-quarter trend would be impacted.

Yes. We’ll take a deeper dive on that, but I will say that the margin was as we planned. There’s nothing unusual that drove that, but we’ll take a look, and we’ll do a deeper dive on your question and respond to you.

Possible, I got to fix my numbers; maybe they’re wrong. Thank you so much.

Our next question comes from George Mihalos with Cowen. Your line is open.

Hey guys, thanks for taking my questions. Just wanted to kick things off, just looking at Finxera. Any seasonality we should be thinking about there? Are you guys still thinking about that contributing around $75 million for the year?

Yes. George, nothing seasonal. It’s really more driven by economic factors. If there’s one aspect of seasonality, you see a dip towards the holidays in terms of enrollment, and then normally January’s probably a less strong month relative to trend, but then those holiday bills come in, and we start to see things pick up in February and beyond. That segment is actually presently boarding above our budget expectations, and consumers are graduating less quickly from their resolution than we’ve modeled. We expect over the course of the year to see the benefit of better boarding trends and lower graduation rates from debt resolution. I should say slower is more accurate.

Your quoted expectation for the top line is a good expectation.

Okay. Okay, thank you. Just one last thing, just given the rate hike cycle that we’re in right now, how are you guys thinking about interest expense, or maybe another way to ask it, how are you thinking – what are you baking in for rate increases and maybe remind us of the portion of the debt that would be susceptible to short-term rate changes? Thank you.

We have a base LIBOR rate of 1% 30-day LIBOR, which is still under 1%. So it’s entirely flexible to that, to rate hikes above that. We have a natural hedge within the business because of all the cash that we have on the balance sheet with respect to CFTPay. So, net-net, we won’t be impacted.

Okay, thank you.

I would say this way, George, net-net, our debt costs should not increase because we have a 1% LIBOR, which doesn’t increase until the three-month LIBOR gets above 1%. We’re not there yet, but we get the benefit of the increased earnings on our deposit float, which has already begun. So on a net basis, we should see a net gain, and that net gain would flatten as rates go above 1%.

I am showing no further questions at this time. I would now like to turn the call back over to Mr. Priore for any closing remarks.

All right. Well, thank you very much. I just want to thank everyone for their participation in the call today. We will make ourselves available for any follow-up questions. Appreciate the support of our investors and all of the tremendous effort by the Priority team to deliver another excellent quarter. Hope everyone has a great day and a terrific remainder of the week. Thanks so much.

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect.