PRTH - NASDAQ

Good morning, and welcome to the Priority Technology Holdings First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Chris Kettman.

Good morning, and thank you for joining us. With me today are Tom Priore, Chairman and Chief Executive Officer of Priority Technology Holdings; and Tim O’Leary, Chief Financial Officer. Before we give 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, Tim. As we wrap up our Q1 review, I wanted to reinforce a few of the more meaningful attributes that will continue to set Priority apart from others in the fintech and payment sector. First, as our performance demonstrates we are built for efficiency and our platform can support a diverse portfolio of software and payment assets that perform in a challenging economic environments. Second, our lean, focused technology stack is built for the future of payments and the accelerating convergence with banking functions that will drive above-market growth with minimal, if any, investment. Our products are positioned to capture new sources of revenue from banking and financial services embedded in emerging modern commerce business models. If there are those that question the veracity of this view, perhaps you might consider the recently announced partnership between Apple and Goldman Sachs to deliver banking function to Apple Card users, or Twitter’s reported intention to embed payments and banking into its commercial network to name a few. Meshing payments and banking functionalities will inevitably be table stakes in our sector. Last, we’re an organization that continues to operationalize vision. What I mean by this statement is that beyond the unwavering work ethic and commitment of our technology, service and sales, and operational support teams, we have dedicated effort and personnel to be at the forefront of evolving strategy and customer trends to deliver results day-in and day-out. We believe it is our clear informed vision and passion to execute that will deliver the long-term value our shareholders should expect. We appreciate you all taking the time to participate in today’s call and the ongoing support of our investors and analysts. Operator, we’d now like to open the call for questions.

[Operator Instructions] The first question is from Brian Kinstlinger of Alliance Global Partners.

Hi good morning guys, thanks for taking my questions and solid numbers. Transaction volumes have held up really nicely in light of the economy of numbers, especially that we’ve seen for other companies. Can you remind us roughly the percentage of revenue from consumer and retail, which I think is relatively low as a percentage of consumer payments. Then how are transaction dollar volumes in those verticals performing compared to your other verticals?

So, and just to clarify your question, you’re speaking specifically about the retail SIC codes in the SMB acquiring space?

Correct.

Yes, and then maybe commenting on the other components of your question. We have – you may recall that we mentioned in the full year earnings, when talking about Passport, some of the impact from SVB’s fallout and how quickly we were able to onboard new logos. So certainly, a portion of the growth is from that. But we’ve also seen, let’s say, on a – let me give you some kind of timeline. The growth from existing customers on a year-over-year basis is probably 70%. So…

Great. Thank you for that color on the…

Yes. And I’ll say that – so think about that as from Q1 2022 levels to present levels.

Okay. Great. Last question I’ve got. Normally companies ask – normally, companies get questions on M&A. As I think about the last several years, you’ve taken strategic opportunities to divest businesses at times to delever. Is that right now something that is of Priority? Is it not really? Just trying to understand, is there an opportunity potentially to – with your asset base to delever at all?

Well, look, certainly, there is, right? If you were to just look at – we provide our financials at segment level detail. And we’ve purposely built the business as a single engine – Passport, to collect store and send money with applications devoted to fintech payment business segments to serve customers in those segments, right? MX Merchant, MX Merchant POS suite in SMB, CPX in the B2B vertical, and then, of course, CFTPay and the Passport API in the Enterprise segment. So each of those business segments are detachable without deconstructing the engine that operates the business. So we’re always considerate of what’s the intrinsic value of those segments to folks that operate in those segments and we compete with and may find that we offer some tools that they may not have. So I’ll say that, that’s something that we’re always considerate of, and we built the business to enable that way of thinking. And if we see levels that we think are – makes sense to either divest of an asset or even to divest of a portion of an asset. We’re going to do it if it makes sense, and yes, we would use that money to reduce debt and then probably a portion of it to figure out where we want to redeploy that capital to higher returns.

Great. Thanks so much guys.

Yes. Thanks, Brain.

[Operator Instructions] The next question is from Taylor Johnson [ph] of CGI. Please go ahead.

Good morning guys and thank you for taking my question. I know you mentioned that some competitors are retrenching in light of the economy. Meanwhile, you guys are moving forward with investments. So I’m just wondering if you’re seeing any new opportunities to take share from some of those competitors and what that landscape is like.

Yes, the – look, we are. If probably the sector that has gotten our attention the most is B2B. The B2B payment space – there’s been obviously a lot of enthusiasm around the segment in past years. And some companies that – they raised a lot of money, they’ve maybe not realized their growth goals and have not driven bottom line performance. We think there’s going to be a really excellent opportunity to acquire assets in that space. So we’re diligently looking at opportunities there. And then there’s, I would say, just broadly speaking, in fintech – and we’ve already done a few of these partnerships, I think, as they continue to evolve. These are emerging companies, that are software applications that have realized markets. Guys so these are not, what I would describe as solutions looking for a problem to solve. These are companies that really just got caught in kind of the current environment for venture capital and financing where they’re early stage, good applications in good sectors with real performance potential, but are shy of cash flow positive and need a little bit of assistance to get to the next level. We’re evaluating a number of opportunities there where we come in as an operating partner, and help them realize very quickly synergies for infrastructure. Things as simple as their AWS contract, their database framework and database management. Of course, we have all the back office capability, HR, finance, et cetera, and help these companies, I’ll call it, streamline, so they can focus on their core application. We can help them reduce OpEx and then, of course, leverage them through our distribution to drive – to cash flow positive. There’s a lot of opportunities that are emerging with that type of profile. They are because the venture capital funds that had supported them are not in a position to keep funding them, and they need sources of not just more stable capital but more importantly, an accelerant that could help them maximize the cash they have and get their distribution to market more quickly. So sectors that interest us are real estate. We’ve already shown we’re successful there. We’ve got a good track record, we think there’s a lot to do in real estate. We think there’s a lot to do in construction, which kind of is the variance of the real estate market, and we’ve already done something in construction. The health care segment is another that we’re – we’ve just started something small and growing, but we’re continuing to look at opportunities there for a few reasons. One, it’s just very dislocated generally in terms of how payment reconciliation is managed. And the macro trends are actually unique in health care. The inflationary impact in health care tends to lag the macroeconomic inflation by a couple of years because of the way health care contracts are structured. So we think there’s some additional macroeconomic tailwinds that could benefit that segment. So those are the areas that have caught our interest right now that we’re looking to probably place a few bets.

Thank you so much for that color, that was really helpful. And just another question. Wondering if you could talk a little bit more about some of your new products, specifically including which you feel present the greatest opportunity as of right now.

Yes, I appreciate that. Well, look, the first one, I kind of alluded to them in our comments. The MX Merchant POS suite is – we think is going to really get to energize our distribution. There are a suite of terminals that are integrated to our MX Gateway that will enable all of the software functionality of our MX Merchant application on handheld terminals. And the terminals can be stand-alone, so they can work like a handheld POS at the table or at checkout. So very slick in that regard. They can also be semi-integrated where they work with MX Merchant, even if you have, let’s say, a different POS so they can inject into the point-of-sale that clients are using. And then a full on Enterprise, which is both the mobile terminal device and then works with all of our POS applications, which are MX Retail or MX Merchant Retail, MX Merchant Restaurant, Salon, which will be coming out soon, and then charity. As I mentioned, we also are going deep in the construction space. So we expect to launch a product called MX Merchant Build in the coming quarter. So that’s, I think, one of the really energizing things that are going on at Priority. And as I noted it’s, we know it’s needed. Just you can see just by virtue of the number of distribution partners that have signed up to start to sell that product as it comes to market through our wholesale distribution efforts. We’ve tested it in-house. That test has gone well. As I noted, just in the first quarter alone, we were selling internally over a couple of hundred. So when you consider we really only had it going for a couple of quarters, you’re looking at 100 a month is pretty good numbers from a POS standpoint. Then the other that we think is the game changer is injecting banking into all of these segments that you can not only have your merchant processing and your front-end technology managing your business at Priority, but you’ll get your Passport account, which can be instantly funded with your batches. If you’re running transactions through our gateway, we’ll be able to fund those transactions in five minutes into your Passport account. And that money is available for businesses to acquire supplies, make other purchases, whatever they need to do to manage their money. It’s going to operate like your standard business bank account: be able to write checks, have a debit card linked to make purchases with a full reporting front-end – reporting portal that will look very much like your high-end bank account at a money center bank, and I would submit probably superior to a lot of the smaller regional community bank offerings that merchants have accessibility to. So those are the two things we’re most excited about. And I think uniquely for Priority, and I really want to underscore this point is, that’s all going to flow straight to the bottom line. We’ve – those tools are built, they’re already operating at scale in other segments of our business – call it the Banking as a Service capability. So these are not heavy OpEx and CapEx spend items for us. They’re leveraging, scaled, excellently designed infrastructure to deliver these solutions to our customer base.

Thank you so much. That was really helpful and say and thanks for taking my questions.

Thanks for the great questions.

This concludes our question-and-answer session. I would like to turn the conference back over to Tom Priore for any closing remarks.

All right, well, on behalf of the team at Priority, we want to thank everybody for taking the time to participate in this morning’s call. Special thanks to the analysts that continue to evangelize Priority, and of course, to our supportive investors. We’ll keep delivering results. Thanks very much.