Q1 2022 Priority Technology Holdings Inc Earnings Call
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 speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press. The Star then the one key on your Touchtone telephone.
If you offer assistance at any time, Please press Star then zero.
I would now like turn the conference over to your Speaker host Chris Cadman. 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 Volker <unk>, 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 come.
The company I'm 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 a total quarterly revenue increased by more than 35% from the prior year to a record $153 million in Q1.
Our strong top line results drove a roughly 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.
Okay.
Importantly, when adjusted for the acquisition of <unk>, Sara and the risk pairing of our specialized acquiring segment.
Our revenue grew organically by 39%.
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 five and some of the company's performance statistics.
As we've previously highlighted our native platform efficiently serves the F&B b to B and enterprise payment markets at scale supporting over 245000 active merchant accounts more than 360000 active bank deposit accounts and processing total annual P.
<unk> volume of over $90 billion with roughly 88% derived by 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 projected for 2022.
Yeah.
As slide six 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 <unk> markets and provide enterprise partners the ability to embed payments and banking features into their core offering 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 its peers reporting year over year Bank card volume growth of 18, 5%.
And revenue growth of 19, 2% in Q1.
To help demonstrate smbs outperformance in the industry.
On the slide we've included the growth rates of the top five nonbank merchant acquirers in the U S.
As you can see priority is 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 BTB payments segment, once again reported an exceptional quarter as it continued to add new partner channels on the strength of our C. P X product.
We expect that recently announced partnerships with <unk>, a leading ERP manufacturing and distribution industries with over 15000 licensed companies globally.
And representing over 60 billion of addressable AP spend.
Premier Health care, a $70 billion health care GPO marketplace, serving over 4000 hospitals and 225000 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.
C. P X 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 <unk> segment delivered year over year revenue growth of 68, 6% in Q1.
And operating income increased $800000.
In addition to the partnership's I've mentioned.
Our currently contracted pipeline.
Sits at $610 million positioning the business to deliver consistent winning results.
Lastly, our enterprise payment 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 $5 2 million increase in operating income.
Enterprise payments is currently supporting over 20 active integrations managing over 360000 deposit accounts and over a half a billion in deposits.
Our enterprise segment has consistently piling up integration wins in sectors like real estate and construction technology.
<unk> software systems and legacy payment operating platforms.
At this point I'd like to hand, it over to Mike who.
We will provide further insight into our performance during the quarter along with trends in each business segment.
Thank you Tom and good morning.
That review the segment level contribution to our consolidated results. Please refer to the supplemental slides for further 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 three 6% growth in average ticket.
Average merchant count of 243383 in the first quarter 2022 grew seven 3% over first quarter 2021.
Merchant boarding trends were strong new monthly merchant boards averaged 4675 in the quarter, our historical monthly averages ranged from 4300 to 5000.
BTB payments revenue of $5 9 million increased 68, 6% driven.
Driven by the revenue momentum that began to build in the second half of last year.
And managed services increased program activity drove a 44, 4% growth rate and as C. P X new customer additions strong volume increases within existing customers and a minimum revenue recovery from a 'twenty 'twenty contract termination drove a 94, 1% growth rate.
The growth rate was 41, 2% excluding that recovery.
Enterprise payments revenue of $17 4 million increased $16 7 million from point $7 million.
CFT PE acquired in September 2021 drove this growth.
Gross profit of 51.8 million increased 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 is expected to return to year over year growth in the third and fourth quarters, leading to a more than 15% growth in full year 2022 over 2021.
<unk> gross profit of $3 2 million increased 60% with 63, 3% growth in <unk> and 48, 6% growth in managed services.
Enterprise gross profit of $15 7 million increased $15.5 million from point $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 and 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 CFT pay acquisition or the head count growth and higher noncash stock based compensation.
The growth in salaries and benefits included $1 million increase in stock based compensation.
SG&A of $7 5 million decreased from $8 3 million.
There were $4 1 million of nonrecurring expenses in Q1, 2021 compared with <unk> 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 <unk>.
$8 million due primarily to the temporary gross profit decline of $5 5 million in specialized merchant acquiring.
Excluding this decline F N b operating income increased $4 $7 million.
<unk> operating income of <unk> 4 million improved by <unk> 8 million from a loss of <unk> 4 million in Q1 2021, reflecting the higher gross profit.
Enterprise operating income of $4 5 million increased $4 three from <unk> 2 million in Q1 2021, driven by the September 2021 acquisition.
Corporate expense of $6 6 million decreased 1.9 million. The decline is driven by $3 $6 million lower nonrecurring expenses, partially offset by growth in head count noncash 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.
Debt levels, driven by a 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 dollar revolver repayment.
In April we continued to reduce the revolver with an additional $4 million repayment.
And 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 on our revolver.
Our $30 million revolving credit facility currently has 6 million outstanding.
We are well below our total net leverage ratio covenant of six five times with a total net leverage ratio of 4.55 times at March 31st.
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 unaccredited 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 as supplement that on our income statement with the accretion of discounts and issuance costs of <unk> $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 is managed with precision the.
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.
Now recently I've been reading a book by Angela Duckworth, There was given to me by a friend in the business.
That seeks to define grip.
At its most basic grid is the ability sustained unyielding effort for a long period of time.
But I think we can all appreciate grid, it's tough to predict.
It is challenging to develop.
Well, we all know it when we see it.
At the books Foundation Duckworth presents a very elegant formula that skill.
As a result of talent multiplied by effort.
And achievement.
As a result of that skill multiplied by effort.
And it this is the core of great.
Well noticeably at every step of the formula to develop grit is effort.
And I would submit that.
At the core of priorities consistently strong financial results, regardless of the economic environment are 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 great.
Usually 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 that Greg is begin grained into the DNA of priority.
Speak embraced by our teams.
And we're confident 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, ladies and gentlemen, if you'd like to ask a question at this time you will need to press. The Star then the one key on your Touchtone telephone.
While we compile the Q&A Boston.
Okay.
No first question coming from the line of Steve Moss from B Riley Securities. Your line is open.
Hi, good morning, guys.
Nice quarter here.
Maybe just starting with the outlook.
Outlook here you guys continue to add partners made another announcements and in the past month here.
I realize these contracts are larger kind of curious.
Timeline for any update on the timeline for additions in <unk>.
If you know.
If we could see some upward bias to the guidance here as the year progresses.
Yeah. Thanks, Steve.
So we're already working those channels.
<unk>.
Leads are being delivered from our.
Partners.
Two our sales teams and we're actively working those customers for adoption of Cps.
<unk>.
We are.
We feel confident that we'll see.
Upside in this segment.
As those partnership start to monetize.
And.
As they as they begin to convert you know, we'll we'll start to reflect that as we get a better handle on the pace of conversion of those merchants and and.
And the take rate that well.
We will be able to derive from those contracts.
Okay.
That's helpful and then just in terms of.
Just thinking about the drivers of average ticket size youre going forward indefinitely.
We continue to see an increase there just kind of wondering how much is that just customer mix versus maybe.
Functionary environment, we're seeing these days.
You know.
From our vantage point, it's more of the inflation rate.
That's driving the increase or the mix within our book has not.
Really shifted.
Okay.
I would submit this though as we start to.
We've got a lot of rent.
Payment.
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 were talking to large ticket there that's the average rent is.
Has ranged from 200 1500 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.
The company has grown so.
That's a large step up cost for a large step up in operating expenses.
Maybe just any incremental color.
Just on compensation here or is that kind of a good run rate going forward.
At the beginning of April we did adjust folks.
Salaries.
And that was the average across the board is probably about three 5% so that that will bleed in in coming quarters.
But other than that.
It's just the head count growth from the acquisitions, that's driving the increase.
And I would just offer this to you Steve we've.
We've budgeted for.
Greater head count growth than we're experiencing right.
So where we're seeing greater efficiency.
With our teams.
In accomplishing the build that we want.
So.
We would expect that our.
Head count growth growth budget will be.
We'll be below.
Our.
Budgeted.
Levels, Yeah, Yeah. The head count plan is conservative for that reason.
And then it 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.
And our next question coming from the line of Brian Canceling them with Alliance Global Your line is open.
Okay, great guys, Thanks, and nice results.
First.
Obviously, theres menu can predict a recession so what's the impact do you guys see.
Generally of a recession that each of your three segments and is this scenario in any way contemplated in your guidance.
It is actually.
We will 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 counter cyclical businesses in preparation.
Of what we saw is a just a turn in the business cycle.
So.
You see B to B is one segment that.
The benefits from that it's a means by which businesses gained financing for payment to their supply chain.
They are using tools that.
Enable.
<unk>.
You use a card and digital strategies for for a funding mechanism number one.
Also.
Everyone's tightening the belt, so automation that.
<unk> enables them to redeploy staff or even eliminate head count.
<unk> is important and b to B.
Is a is a segment where those benefits are clear.
So we expect to see continued growth is as these tools get adopted by businesses globally.
Globally.
In addition to that.
We have a market leading product.
That supports.
Folks and the debt resolution.
Arena and.
And we're seeing.
Excellent growth in that segment as consumers.
To start to exhibit stress.
And are enrolling and programs, where we're the administrator of their funds.
To help them resolve debts.
So we expect.
In a more challenging economy that will continue to see.
Strong growth in that segment.
The other benefit of course, because we have money transmission licenses.
We were able to maintain those deposits and direct them to banks of our choosing so we benefit from increase in rates.
And.
I would just offer to you that our assumptions.
Our.
Budgeted in our guidance.
We're very conservative.
In the.
Any inflation environment that would lead to a increase in rates and what additional money, we would earn from the float that.
On those deposits that we maintain and the growth and the trajectory of consumers.
The opting.
Our escrow and administrative services to to help them resolve outstanding debts. So those are two sectors in particular the <unk>.
Other day, where we're winning very consistently as you know.
As the rent and real estate space.
Youre seeing a lot more folks put.
Put rent on.
On card.
Because it's a means of of temporarily financing.
Their rent while their paycheck is coming in every two weeks right. So.
So we're seeing we're seeing growth there and look we built those businesses recognizing that our core acquiring just has natura.
Natural exposure to the general economy.
Our goal has been win market share to offset potential.
Potential drops in.
Uh huh.
In consumer spend.
That you can see that from the growing merchant base and.
And drive drive additional volume on that platform.
Which we're achieving and then we've got our countercyclical segments. It.
It really performed very consistently in.
More challenging economic environments, and it's still early days in that conversion b to b in particular.
Over 50% of of all payments in <unk>.
That arena.
Which is 18 trillion in the U S are still resolved on check so.
We just need to get people to convert from an old method of payment to a more modern one.
And.
We're doing that pretty consistently these days.
Great.
A follow up.
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 no gross margin it really dropped sequentially. So I guess, Mike when we head 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 was over 44% higher than Q4 of last year. So that's just the rebound that we're talking about the rewarding of merchants and we will we will switch over to year over year growth in the third quarter and the fourth quarter.
And full year and that will lead to full year growth.
Conservatively speaking.
Over 15% this year versus 2021.
So she has a lower gross margin was the fact that SMA this quarter was much lower than the fourth quarter.
While the rest of the business grew just sequentially.
Alright.
No. There was SMA grew in Q1 over Q4. So just so we can make sure. We're answering the right question, Brian is what Youre, saying.
Why is the gross margin down so much sequentially is the question.
Between Q4 <unk>.
And Q in Q1.
Yes.
The SMB segment is that what you're asking exactly yes. Thank you sorry for being so better articulating today.
Not at all not at all.
<unk>.
In Q4, we have there's some some annual billings that happened.
Each fourth quarter, which leads to a little bit of a pop in the fourth quarter versus the.
The first quarter.
But specific I can reconcile that and be more specific for you, but that is what jumps in mind.
First we have one more quarter of low SMB gross margin before it.
Seems to fully recover or is that right.
Yes, I guess, what we're and we can take this offline, but that's not what we're actually seeing.
So.
There may be.
Some anomaly youre looking at.
No.
First three three quarters of last year, SMB was 26% to 27% gross margin and it was 25 and now it's 22. So I'm curious when you get back to that 26% to 27% range.
Okay.
Yeah.
Sure.
I think what Youre, what youre seeing.
And where are you will you will see it normalize is is that specialized margin is is high margin.
Okay.
And then 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 and we will take it will take a deeper dive on that but I will say that.
The margin was as we planned so it was nothing unusual.
That drove that but we'll take a look we'll do a deeper dive on your question and respond to possible I've got to fix my numbers may be wrong.
<unk>.
One more one more question just to follow up on the salary and benefits question I understand going forward, the raises and how to think about it going forward.
But I think again correct me if I'm wrong in the fourth quarter, you had a full quarter of can Sarah.
So why.
Or what's seasonal what change that it's up 33% again sequentially compared to become later a quarter, we have with Vince here.
Okay, Yes that was in the fourth quarter, there was some incentive compensation adjustments.
And so we have a higher incentive comp accrual in Q1 based upon our forecast and our performance than we had in Q4, so that was a one off.
This reduction to total salaries and benefits that occurred in the fourth quarter of last year, and just Brian just a little bit of <unk>.
Further clarification around that so we had no <unk>.
Bonus accrual for the <unk> team in 2021.
That was budgeted into the transaction.
So now when we take on the full employee base.
Wasn't in the fourth quarter for all of those folks was the bonus accrual that is now in the numbers that priority.
Okay that makes understood. Thank you totally guys. Thank you so much.
And as a reminder, laser and gentlemen, if you have a question. Please press star one our next question coming from the line of George <unk> with Cowen Your line is open.
Hey, guys. Thanks for taking my question just wanted to kick things off just looking at add fin Sara.
Seasonality, we should be thinking about there and are you guys still thinking about that contributing round about $75 million for the year.
Yes George.
Nothing seasonal it's really more driven by.
Economic factors.
If there is one aspect of seasonality you see a dip towards the.
The holidays.
In terms of enrollment and then normally january's, probably a less strong month.
Relative to trend.
But then those those those holiday bills come in and we start to see things pick up in February and.
And beyond.
So.
But that that segment.
He is actually presently boarding.
<unk> our budget expectations.
And consumers.
Consumers are graduating less quickly.
From.
Their resolution.
Then we've modeled as well.
So.
We expect over the course of the year to see the benefit of.
Better boarding trends.
And.
Lower graduation.
Rates from.
That resolution.
Or I should say slower is more accurate description.
And you quoted expectation for top line is good.
Patients.
Okay. Okay. Thank you just one last thing just given the.
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 for sort of rate increases and maybe remind us.
The portion of the debt that would be susceptible to.
Short term rate changes thank you.
However base LIBOR rate of 1% 30 day, LIBOR, which is still under 1%.
The.
So it's entirely.
<unk> flexible to that to rate hikes above that but we have a natural hedge within the business because of all the cash that we have on balance sheet with respect to CFT pay so.
Net net we won't be.
Impacted.
Okay. Thank you.
I would say it this way George net net we should have a.
Our debt costs, because we have a 1% LIBOR floor don't increase until three months LIBOR gets above 1% right and we're not there yet, but we get the benefit of that.
The increase earnings on our deposit float which has already begun.
Right.
So on a net basis, we should see a net gain.
And then that net gain would flatten as rates go above 1%.
Thank you.
Okay.
I'm showing no further questions at this time I would now like to turn the call back over to Mr. Barry for any closing remarks.
Alright, well, thank you very much.
Just want to thank everyone for.
Their participation in the call today.
We will make ourselves available for any follow up questions I appreciate the support of our investors and.
All of the tremendous effort.
By the priority team to deliver another excellent quarter I hope everyone has a great day.
And a terrific remainder of the week. Thanks, so much.
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.
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