Q3 2021 Priority Technology Holdings Inc Earnings Call
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Ladies and gentlemen, please standby your priority Technology Holdings third quarter 2021 earnings conference call will begin momentarily.
For your patience and please standby.
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Hello, Thank you for standing by and welcome to the priority Technology Holdings third quarter earnings Conference call. At this time, all participants are in a listen only mode. After the speaker presentation.
There will be a question and answer session back a question. During this session you will need to press star one on your telephone. Please be advised that today's conference maybe recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker today, Chris Kirkman. Please go ahead.
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 <unk> 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.
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.
Finally, it's available in the investors section of our website.
With that I would not see now I'll turn the call over to our chairman and CEO, Tom Priore, Okay. Thank you, Chris and thanks to everyone for joining us for our third quarter earnings call.
I would like to begin this morning's call by providing a brief recap of our quarter three results as well as highlighting the continued momentum we've seen so far in the fourth quarter.
Following my segment level review of our third quarter results and balance sheet I will provide some final thoughts on our position in the marketplace.
Closing of the <unk> transaction on September 17.
And our prospects for the future.
As we noted in our earnings release, we continued our first half momentum with a strong quarter, three generating market, leading top and bottom line growth.
On a consolidated basis total revenue for the quarter increased 21, 6% to $132 5 million.
Our top line strength drove a 16, 8% increase in gross profit to $39 7 million and 20% growth in adjusted EBITDA to $23 6 million.
Similarly income from operations increased 17, 2% to $8 3 million.
Importantly these.
These results reflect several encouraging trends when looking ahead to the fourth quarter.
Our total bank card volume grew 22, 1% for the quarter.
Spike self imposed risk bearing in our specialized e-commerce business.
$5 3 million of revenue from our quarterly results.
Furthermore.
We absorbed an anticipated 16, 3% decline in our commercial <unk> segment due to the wind down of an American Express program that began in Q4 2020.
And the loss of $3 9 million of revenue from the sale of rent payment in September 2020.
As with prior periods, our innovative product consistently fuel new contract win.
New merchant adoption remained consistent with an average of 4473 per month in quarter three.
A peek into the start of Q4 revealed continued strengthen our processing platform.
October's Bankcard volume grew 17, 1% year over year, which bodes well for our top and bottom line results during the period.
At this point.
I'd like to pause and hand, it over to Mike who will provide further insight into our performance during the quarter current trends and each business segment and the improvement on our balance sheet.
Thank you Tom and good morning.
For a comprehensive discussion of our comparative results. Please refer to managements discussion and analysis in our Form 10-Q, a link for that can be found on the IR portion of our website.
As far as the Q3 segment results consumer payments revenue was $124 million. This is a 24, 9% increase over 99, 3% in the 2020 quarter growth was driven by $30 million or 33, 3% revenue growth in our base merchant business.
Which was partially reduced by the $5 3 million dollar reduction within our specialized e-commerce business associated with our prudent risk pairing actions.
Merchant Bankcard volume processed in this segment was $13 8 billion. This is a 23% increase over $11 2 billion in the 2020 quarter.
Merchant Bankcard transactions of $151 5 million increased 23, 6% from $122 6 million in the 2020 quarter in.
An average ticket of $91 19 decreased slightly from $91 62.
Consumer payments operating income was $14 $7 million. This is a 32, 1% increase of $3 6 million over operating income of $11 1 million in the 2020 quarter key drivers were a $6 $6 million increase in gross profit and <unk>.
$8 million of lower SG&A expense, partially offset by $1 $3 million of higher salary and employee benefits expense and $2 5 million of higher depreciation and amortization expense.
Commercial payments revenue in the third quarter.
Was two $4 $2 million and that decreased by <unk> 8 million or 16, 3% compared to revenue in the third quarter 2000 $25 million.
Revenue in this segment is derived from CTX, which is our accounts payable automated solutions business and from our curated managed services business.
Revenue from <unk> in the third quarter 2021 of $1 6 million increased <unk> 1 million or three 9% from $1 5 million in the third quarter of 2020.
In light of very strong volume growth. The revenue increase was moderate due to overall pricing mix revenue from managed services and third quarter 2021 of $2 6 million decreased by <unk> 9 million or 25, 1% from revenue in third quarter of 2020 of $3 5 million.
This decrease was driven by a curtailment in 2020 of a customer's merchant financing program.
Revenue trends in this segment strengthening managed services began a new supplier enablement program in the second quarter that added $1 million of unplanned new revenue in the third quarter and the sales pipeline for new contract signings is strengthening and see PX and volume trends with existing customers.
Strong.
Commercial payments operating income was essentially breakeven, which compares with operating income of <unk> 2 million in the 2022nd quarter.
This comparative reduction was driven by a gross profit decline of <unk> 4 million due to the year over year reduced revenue in managed services being partially offset by <unk> 2 million of lower other operating costs, primarily salaries and employee benefits.
Integrated partners revenue in third quarter, 2021 of $4 3 million decreased by <unk> 3 million or seven 1% compared to revenue in third quarter 2020 of $4 $7 million.
The third quarter 2021 includes $3 million of revenue from the acquired from Sarah business in third quarter 2020 includes $3 9 million of revenue from the disposed rent payment business.
The other product offerings in this segment for real estate hospitality and health care contributed revenue of $1 4 million in the third quarter of 2021, and this is a 75, 4% increase from <unk> 8 million in third quarter 2020, largely due to growth within real estate.
Integrated partners operating income in third quarter, 2021 of $1 2 million increased $1 million compared to <unk> 3 million in third quarter 2020.
Third quarter 2021 includes $1 million of operating income from the acquired <unk> business and third quarter 2020 includes <unk> 3 million of operating income from the dispose rent payment business.
SG&A in the third quarter 2020 included $1 million of nonrecurring costs within the disposed rent payment business.
Corporate expenses were $7 6 million in the third quarter 2021, an increase of $3 1 million from corporate expense of $4 5 million in third quarter 2020.
Now this was driven by a $2 4 million dollar increase in SG&A due largely to $2 $1 million of higher nonrecurring expenses and <unk> $7 million increase in salaries and employee benefits, which is largely due to $4 million increase in noncash stock based.
Sure.
Before turning the call back to Tom I will review, our liquidity and balance sheet and also comment on our revised full year 2021 financial guidance.
We ended the third quarter 2021 with <unk>.
Unrestricted cash of $17 million and $10 million of available borrowing capacity on the revolver.
Last week, we repaid $5 million of the revolver, which increased the available borrowing capacity to $15 million.
On September 17th we completed our acquisition of <unk>, which was financed with $320 million of additional senior debt borrowings $75 million of additional senior preferred stock issuance and seven 6 million shares of common stock issued.
Notes to our third quarter financial statements in our Form 10-Q.
Details of the acquisition and related purchase accounting in note two.
Outstanding debt obligations in note nine senior preferred stock in note 10 and common stock in note 14.
We continue to be well under our total net leverage ratio covenant of six five times with a total net leverage ratio of four to seven times at September 30th.
This calculation is provided in this morning's earnings release and is our intention to continue to use free cash flow to reduce leverage.
As Tom mentioned, we continue to deliver strong financial performance and we have updated our full year 2021 guidance to reflect the forecasted post acquisition contribution from <unk> Sara.
The updated outlook has revenue expected to range between $500 million to $520 million and adjusted EBITDA expected to range between $94 million to $98 million.
I'll now turn the call back to Tom.
Thank you Mike.
Before wrapping up I would.
I'd like to provide a few final thoughts on our positioning in the marketplace and our prospects for the future.
With the final regulatory approval in September of our nationwide money transmission licenses and.
And result in closing of the <unk> transaction.
We are positioned to stake our claim as the payments powerhouse.
We possessed payment solutions to collect store and spend money on a single technology platform that operates at scale.
In high growth verticals.
<unk> modern commerce.
Today's smbs and enterprise businesses recognize the value.
Of a modern payments partner that can handle traditional acquiring and payment facilitation requirements.
As well as provide tools to distribute funds to employees gig workers and vendors from a single digital platform.
That is why we already have new beta clients embedding, our payments and banking solutions into their platforms.
And why a multibillion dollar company like Wix.
The SaaS E Commerce solutions serve millions of Smbs globally.
Recently partnered with priority.
To be a preferred payment solution for its clients.
As a follow up to this call I would encourage you to look at the Investor presentation. We filed today and is posted on our website.
It provides an updated overview of our differentiated solution and investment story.
The numbers speak for themselves on.
On a consolidated pro forma basis, including the impact of the Covid period.
We produced a two year.
Revenue constant annual growth rate of 16%.
A two year.
Adjusted EBITDA constant annual growth rate of 37%.
On Q3 L.
LTM 2021 pro forma revenue of approximately $550 million.
We achieved gross profit margins of 39%.
And free cash flow conversion of 45% of adjusted EBITDA, while maintaining recurring net revenue.
94%.
We are optimistic that the continued outperformance of our diverse payment software business line.
That would be constructed with intention and managed to perform.
In varying business cycles.
Gain the recognition they warrant from the investment community.
I want to close by thanking our team for another excellent quarter and delivering on our mission.
To build innovative payment technology that powers modern commerce.
Operator, we'd now like to open the call for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
Draw. Your question refers to the balance sheet. Please stand by we compile the Q&A roster.
Our first question comes from Brian singer with.
Globally. We May proceed with your question.
Hi, guys great profitability.
Can you comment on the success rate in volume, maybe you're having with the cross selling of the instant claim banking as a service to your legacy priority customer base and how quickly can you educate your entire question meet customer base about this offering.
Sure Brian.
<unk>.
Candidly the the the opportunity across our our existing client base.
In the SMB space.
And.
And in the.
In the <unk> space is is actually still upside to our performance.
The.
Customers, we have now that are coming in.
Our largely new.
And are implementing the digital banking and payments infrastructure into their platform.
We have a handful of existing Isd partners.
That are.
Yes.
I'll, just say implementing new features that we offer so.
Uh huh.
Those are additional.
Additional revenue opportunities to the upside as those features get released into their platforms.
Now.
We'll be finalizing the the feature set.
It will include.
Banking.
And embedded wallets.
To our existing customer base.
In Q1.
2022.
As an example of that.
If I'm in acquiring customer of priority.
I can.
Within the early part of 'twenty two.
They immediately.
Permission for.
A.
Bank account to facilitate instant funding.
And.
Get cash from my <unk>.
Acquiring processing into my business more quickly.
That has yet to be cross sold.
So.
We're right now being I would say very conservative.
<unk>.
What we think the additive prospects of that far.
And we'll have more.
More meaningful guidance as we as we roll into 'twenty, two but hopefully that gives you some insight into.
I'll, just say whats embedded in our performance today and what the future.
We think can hold.
Great and then in terms of merchant acquiring your execution has been quite steady.
Last many months almost over a year.
But you've posted such solid growth. So how do you accelerate the number of merchant acquisitions to sustain stay 12% revenue growth given the.
The larger base.
Yeah.
Well I think it's two fold.
Number one is we just continue to be there.
The platform for the retail and community.
So our new wins of.
New resellers.
Yeah. It is consistent.
So that will certainly be a source of consistency.
The other and again, that's I think that speaks to why we just trying to be very measured about the way. We're looking at the margin growth within our customer base. So we think that the.
Biggest opportunity we have for the.
The consistency of our revenue growth is adding product features like instant funding and then the utility of a bank account to pay out to vendors to employees et cetera.
From that from that operating account with priority.
And.
So you know.
We will as we get metrics around that I think will.
We'll we'll be in a position to share with us what the value of that.
Is.
Incremental revenue and margin basis per merchant.
Got it makes sense and my last question I'll get back in the queue with a couple of more is.
Your D to B or C PX business.
<unk> been fairly slow to take off maybe the only piece of the priority story and he's not enjoy D.
Rapid success, but your overall businesses experienced maybe if you could just add some detail of what's going on there is the platform ready for adoption does it need more R&D spend you get long sales cycles and how we should think about this as we look into 2022.
Sure Great question.
So we are we've.
Really experienced just a longer sales cycle.
The.
We have had a number of new adoptions through this past quarter.
So you know that that as you sign, let's just say a buyer customer and I as the <unk>.
Starting to convert their spend onto their suppliers is is an activation process that.
That takes a little bit of time.
So we're in the process of doing that.
As well you know I would.
Just submit to you.
Our early product offering.
Was on the Fi channel.
And.
That.
Proved to be.
And even it further extended sales cycle because of Covid.
So.
So we redirected a lot of our sales efforts into the middle market and that has borne fruit. So I think you'll see the the effect of that and the acceleration of new contract signings.
And.
And now we're seeing some of the banks that were in the pipeline have been much more actively engaging as of.
Q2 2022.
And our sort.
Sort of are coming to us.
Susan decision process.
So.
Those those those really change the trajectory pretty meaningfully.
Because they are their existing books that.
That represent large conversions.
Great. Thank you I'll get back in the queue.
Thank you. Our next question comes from George Melas with Challenge you May proceed with your question.
Hey, guys. Thanks for thanks for taking my questions I guess, the first one that I wanted to ask maybe I'll roll too.
In in one shot just as it relates to the specialized acquiring some of the merchants that you sort of took a more prudent approach was kind of hoping you can talk a little bit about that is it is it sort of vertical specific was there something.
Particular that.
Uh huh.
Made you.
Take another another look at them and then.
The revenue yield within consumer that has been fairly stable now call at around 90, or so basis points is that is that a good measure to be thinking going forward into well into 2022, as we model the company out.
Okay.
So thanks for the questions George with.
With regards to specialized.
I think I had I had mentioned it in the previous quarter.
This is a segment where the track.
Transaction.
I'll call it the transaction management.
Is is really important to us.
How the.
The e-commerce.
Scripture end client is managing.
The transaction.
Activity and we saw some signals with certain customers that.
Just we thought were.
We're really pushing the envelope for the way they were managing their consumers.
And.
And we took action.
To to.
Parse them out of the portfolio.
And.
You know that.
We had anticipated would would create some drag in that segment.
And as you can see organic growth as it was already outstanding and as you know.
It was kind of well positioned to to just cleanse it.
And.
We were able to put.
Some other risk monitoring.
Practices in place that we think we will call it out faster.
And.
Now, where we're kind of a.
Much more active in the segment.
And you know.
But we're gonna. We're you know we're going to continue to to to really be diligent.
Within this segment because we think it's in a responsible way to.
To operate and frankly, we'd like to see others, who were in the segment you know do the same.
Because we think will help the overall marketplace just just behave more consistently in the subscription E Commerce segment.
So hopefully that gives you some some granularity there.
We're already seeing let's just say if you if you think about the net merchant base in that segment.
That's already that's already been increasing again.
So we like the trend we're seeing there is developing into Q4.
With regards to margin.
Look on the on the base doesn't exist today in this sort of goes back to Brian's question.
Basically exist today, yes, I would say.
What youre seeing in terms of the margin is is it is a good proxy.
The game changer, there is as we start to drive adoption of.
Instant funding and other.
I'll call, it banking oriented or pay out opportunities within that base.
That's that's going to drive the incremental margin opportunity, we see in the SMB space.
Because every single merchant as we move forward.
George if you could think about it this way every single merchant on the priority.
Our platform will be activated for.
A <unk>.
Okay.
And then it's incumbent upon us to drive the adoption of those features with it because it just makes economic sense for the customer.
And the extent of which we do that.
Is going to change the margin trajectory right because it's it's just incremental to an existing customer.
Got you know that's that's that's very helpful and just just curious early days, obviously, but sort of initial thoughts as you've got you now.
Sure under the umbrella right now any surprises positive or negative any any sort of change in terms of how you're thinking about.
The acquisition and the opportunity related to wood thanks, guys.
Yes.
From a technological standpoint the.
The convergence of our payments and banking platform and to operationalize It has gone.
Uh huh.
At or slightly faster than than.
The pace, we had model too.
The other thing that I'll say cautiously optimistic on so look new boardings onto the.
The CFT pay the consumer finance platform. So these are consumers and opening accounts for saving four.
You know for debt payments, new boardings are almost right at the.
The pre Covid period, so that's a very positive.
And.
A lot of the macroeconomic news that is.
Is out in terms of the just the overall debt in the U S consumer.
It was creeping up so that generally bodes well for the consumer finance segment.
And we think will be.
Aspect of performance for us in the future but.
That that could surprise to the upside.
So right now our trends or trends are positive.
We're seeing you know net new account creation in that segment, particularly as stimulus stimulus is has receded.
And we're seeing some macro trends that.
Could could present some some further green.
Green sprouts to that segment as well that were following closely.
Great appreciate the color guys. Thank you.
Thank you.
Thank you and as a reminder to ask a question you will need to press star one on your telephone. Our next question comes from Andrew Scott with <unk>.
Roth Capital Partners you May proceed with your question.
Good morning, and congrats on the strong quarter.
My questions have been answered, but I just wanted to see if you could provide.
Some additional commentary on the base revenues. This this quarter, maybe walk through the dynamics and what verticals they have performed well thanks.
Yeah.
Sure.
Mike if you want to sort of comment on an aggregate level.
Just in terms of the revenue growth within the consumer segment, Andrew wasn't consumer segment, you wanted to focus on Yep Yep.
Okay.
And then I can provide some some dine.
<unk> dynamics as to the the industry verticals, where we have seen.
Relevant performed sure.
Sure well you know.
Coming out of Covid I mean, there's clearly been a migration to a higher mix at the point of sale of electronic payments. So that's certainly driving the great volume growth that we've been saying and a dynamic that we've seen in the mix of businesses. We're almost we're returning back to pre COVID-19 kind of vertical mix.
Back in April.
April obviously in April of 'twenty.
Our hospitality restaurant business was way down because many of those.
Merchants had shut.
Now, we're kind of almost back to two two at the same sort of mix in the 16, 17%.
From a vertical mix, but just I think.
Our products that Tom was referring to obviously is of great interest to our merchant base. So that's helping with signing new merchants and new isos.
And that's driving volume growth, but then also the macro issue of just the overall growth across the industry people going over to electronic is certainly helpful as well.
Did that answer your question.
Yeah that was great. Thank you very much guys.
Thank you Anna.
Singer.
Oh, I'm, sorry, Andrew just to put a fine point on it.
There's there's a couple of.
Where we've seen continued growth.
So Mike is spot on and we've seen the hospitality kind of get it.
Especially in the ER.
Smaller.
So call it a small restaurant segment.
It is kind of back up to what it had been.
In fact, you could probably experienced this right just up and down here.
Your neighborhood.
The capacity in restaurants, Ironically has expanded because now they've allowed people to set up inside and outside across most of the country. So.
We've seen that reach pre COVID-19 levels.
Professional services as well has been.
Strong growth area. So.
So our tools are really well designed for.
The contractors.
<unk> you know kind of your service businesses that are particularly mobile and in office.
We've seen we've seen good incremental growth there.
And that's.
That's probably permanent.
Particularly because.
The networks have enabled more.
Flexibility around how car.
Card acceptance as is.
And by the way the.
Oh, many of the states have opened up things called.
Cash discounting or convenience billing et cetera and have enabled.
Businesses to charge consumers for the convenience of using digital payments. So that's encouraged more to do so.
And.
Particularly those that you know in the past probably were a little bit more reluctant like.
Like service businesses, So we expect that trend to continue.
For a good bit further and we're really optimistic about the prospects.
Driving this convergence of.
Banking that leaves cash acceleration and then the use of of of digital payments to buy goods and services on a single platform will mean for businesses like that.
Because cash acceleration there really has.
That's the name of the game.
For small businesses.
Yeah.
Thank you. Our next question comes from Brian singer with Alliance Global You May proceed with your question.
Great. Thanks, two follow ups can you talk about the trends your visibility you have into that managed services client that you talked about how big could this customer b to small.
Business Freedom managed services piece and then.
I forget so I apologize in the third quarter was there any revenue in managed services related to that customer that was winding down or is that completely wound down.
It's the same customer and what did they just run different programs.
And so.
So what I would say there we're in conversations actually Institute another program with them.
So it's positive trends there.
For sure got it.
Okay and then the only other question I had as we head into 2022 and none of that's been plenty of personal guidance upon me.
I know youre not prepared for that but.
You made an acquisition you've got a couple of different businesses.
Is there any seasonality we should be thinking about.
We are.
We don't have a ton of seasonality in our book as you might expect like Q4 is typically a little bit larger for us.
Just because of the holiday period.
But not.
Not wildly so.
So we see historically.
A little bit of pickup in Q4.
But generally speaking we're pretty consistent through the through the year.
I would you know you're not talking about <unk>.
<unk> of more than a couple of percent.
Relative to the rest of the year.
Great. Okay. Thanks, so much.
Yeah.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Tom Priore for any closing remarks.
Yeah.
Well I want to thank everyone for taking the time to.
And participate in our quarterly earnings call.
As you can probably tell were very excited about the prospects for the future.
And we certainly believe that.
The the.
Yeah.
The trends that you've seen in our business.
Particularly those in.
In times when the market has been less favorable.
Reflective of.
The the the consistency that our platform can deliver.
We will.
As we had reflected in the past we are laser focused on execution, we remain so.
We have.
We think a very differentiated plan that that is he's going to be high value too.
Customers, we serve and we are laser focused on delivering those solutions that we we know they're looking for.
From the active conversations that we consistently have.
Which is what sort of gives us the level of confidence in.
And what we can deliver will continue to be very measured and we thank you for for the for the support of our business and.
Unwillingness to understand more about it and where we're headed.
I hope everyone has a great day and enjoy the upcoming Thanksgiving holidays.
And remains remain safe thanks.
Very much everyone.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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