Ladies and gentlemen, thank you for standing by and welcome to the Priority Technology Holdings' Third Quarter 2020 Earnings Call. I would now like to introduce you to today's conference call Mr. Chris Kettmann. You may begin, 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 as defined in the Private Securities Litigation Reform Act of 1995, regarding future expectations about the Company's business, management's plans for future operations or similar matters, which are subject to certain risks and uncertainties.

The Company's actual results could differ materially due to several important factors, many of which are beyond the Company's control including those risks and uncertainties described in the current report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2020..

Thank you, Chris and thanks, everyone for joining us for our third quarter earnings call. I would like to begin this morning's call by providing a brief overview of our impressive quarter 3 results along with the discussion of the sale of our rentpayment.com assets during the quarter.

Then I'll turn it over to Mike who will go into more detail on our segment level performance, our continued cost control initiatives and the improvement of our balance sheet.

As you saw in our earnings release, we reported exceptional third quarter 2020 results reflecting strong demand in each of our business segments despite continued challenges associated with the COVID-19 pandemic. The momentum we saw in May and June carried forward into the third quarter.

As the strength of our product offerings and diversified countercyclical assets allowed us to quickly adapt to changing COVID environments to deliver a strong top line revenue growth and bottom line results. There are few quick highlights I'd like to share.

During the quarter, revenue in our core consumer segment grew by 20% year-over-year as merchant bankcard processing dollar volume increased 6.3%. Within this, we saw an explosive 800% growth in our specialized e-commerce segment driven by increased online purchase activity.

Gross profit was $34 million during the period up nearly 13% from a year-ago's quarter and adjusted EBITDA of nearly $20 million increased 28.1% from the third quarter of 2019.

This EBITDA improvement was driven by a combination of broad-based demand for our services, continued disciplined driving automation and expense reduction initiatives and the counter-cyclical nature of many of our payment assets. During the quarter, we also announced a definitive agreement to sell our rentpayments.com assets to MRI Software.

As you know we founded Priority Real Estate Technology in 2018, and it is comprised of a number of real estate technology assets..

Thank you, Tom and good morning to everybody. I'll begin by reviewing the very strong revenue and income trends on a consolidated basis, the pro forma impact of the rent payment sale and then I'll provide commentary on business segment performance.

All comparisons will be between third quarter of 2020 and the third quarter of 2019 unless I say otherwise. Our revenue growth momentum has returned and is now stronger than the pre-pandemic rates.

Total revenue amounted to $109 million for the third quarter, this is the 16.1% growth over the prior quarter and an 18% growth over this year's second quarter. As previously discussed, we began 2020 with very strong revenue growth through mid-March. Then COVID hit in mid-March and the total first quarter revenue growth came in at 10.6%..

Thanks Mike. I'd now like to share more detail around the most recent trends we've been seeing in the overall business. While the global pandemic continues to impact Priority in a number of ways. We're pleased to have rebounded from its initial impact earlier in the year in a way very few in our industry have been able to do.

As Mike noted processing volume grew by more than 6% in the quarter and we saw outstanding performance from our e-commerce business. Commercial Payments remain relatively steady, particularly in CPX accounts payable and our automated solutions and integrated payments continued to grow.

Underlying the strength of our product offering and best-in-class client service, our merchant adoption trends remain consistent with historical levels of 4,500 to 5,000 new merchants voted per month.

Importantly, we've continued to see the strong third quarter trends carry into the fourth quarter with total bankcard processing volume in October exceeding $4.3 billion. That's an improvement of nearly 5% over 2019 despite one less processing day in October 2020.

This happens to be the highest ever bankcard processing month in Priority's history, generating consolidated net revenue of $37.9 million. Based on our current operating margins, this would imply consolidated EBITDA of $6.7 million for the month of October 2020.

An annualized run rate excluding the income from rentpayment.com sale of $80 million, and looking forward, a run rate leverage of 4.6 times. Our performance throughout the pandemic reflects several key operational and strategic differentiators.

First and foremost, Priority's payment technology and operating infrastructure is purpose-built to deliver processing scale, agility and responsiveness to monetize merchant networks for our partners. Second, our diverse sales channels have continued to add net new merchants which remains one of the lifeblood of our business.

Lastly, the value of our integrated product offerings across these channels in real estate, hospitality, healthcare, B2B payments and automated payables has allowed us to tap into broad and diverse merchant networks in consumer and corporate payments ensuring we mitigate risk from a downturn in any one area of the economy.

Just as important, we believe that the conditions influencing behavior in the current environment signal a significant change and how businesses will need to operate in the future and we are well positioned to cater for that new behavior.

Increased use of technology to support contactless e-commerce, integrated software with digital collection tools to support healthcare, revenue cycle, real estate payment collections and accounts payable for businesses of all sizes will likely perform well.

Although we're extremely proud of our success over the past six months, especially during a global pandemic I can assure we'll not take our foot off the gas.

We'll continue to work hard to leverage our diversified countercyclical business to adapt to the evolving economic environment while remaining disciplined with our cost structure especially as COVID cases rise in the US and states evaluate reinstituting stay-at-home orders.

We will also look to identify ways to bolster our balance sheet by reducing debt and enhancing overall liquidity giving Priority the flexibility necessary to navigate through this uncertain environment while also investing in our long-term future.

Before I wrap up, I'd like to quickly thank the Priority team for their continued hard work and dedication over the past six months. It hasn't been easy, but our success reinforces the exceptional talent we have throughout the organization and the quality of the platform we've built over the past several years.

I'd also like to acknowledge a new member of our team, Dave Faupel, as our Chief Marketing Officer. Dave has more than 25 years experience building high performing marketing teams, enhancing brand value and driving revenue throughout organizations, and we are excited to welcome him to the team as we enter our next phase of growth.

In conclusion, we're very pleased with our third quarter results, especially in light of the ongoing impact of COVID-19 and we are excited about the opportunity to build our partnership with MRI Software.

As we move further into the fourth quarter, we expect the momentum of our integrated product and payment infrastructure as a service offering to deliver additional growth and we'll remain focused on leveraging our platform to drive greater value to our shareholders. Operator, we'd now like to open the line for questions..

Our first question comes from Brian Kinstlinger with Alliance Global Partners..

This is Jacob on for Brian. Thanks for taking my questions.

With the second wave of the pandemic across the US, have you seen any changes in the volumes of your businesses in October, early November?.

We've not. As mentioned in October, it actually was our highest processing month ever. And we've continued to see, I'll say a similar growth year-over-year through the early part of November. So we are - we're very optimistic about the continued consistency through the quarter..

And a couple of more.

Can you highlight industries where your business is seeing solid demand and alternatively where industries are being pressured?.

Sure. We've - higher performing segments in wholesale, trade, in - I'll call it trades businesses, in particular. So these are - these are your landscapers, farmers, HVAC segment, more of that has gone to from check to electronic. The - we've continued to see growth in the wholesale side of our business.

So this is - these are just B2B payments, payments being made between kind of a buyer, supplier relationship and the segments that are still down a bit on the card present side or where you'd expect, hospitality is still struggling although we have a - I would say, by industry segment standards, probably a smaller considerably smaller footprint in that segment, 17% of our - of our merchant base is in that segment.

And if you look at the broader economy is probably more 30% would fall into the restaurant hospitality category, maybe a bit higher than that. So that - that's where salons as well, is another sector that is performing. It was down kind of year-over-year.

The - those are the kind of the general trends I would say across, that stand out, but we've had the benefit on the - on that hospitality side of providing products that allow for curbside and other forms of delivery to the customer base. And we have higher margins on that.

So despite the drop in volume, our margin per merchant in that segment has seen some improvement, which has helped us kind of buoy the overall impact in that segment..

And can you talk the....

The other area where we're seeing substantial growth is of course e-commerce which was noted a number of times, which - standard e-commerce..

Yes.

And can you talk about the adoption of eTab, how that's going as we head into winter and curbside pickup could be even more important?.

Yes, we've seen fantastic adoption of the product that has - those trends have been triple-digit growth year-over-year. We've got some exciting network partners we're working on as well in that area.

So we're very constructive on its future and we don't see that, to your point, it's not only being adopted more broadly by the traditional hospitality segment, but we're actually seeing it used in kind of non-traditional areas, liquor stores, convenience stores, folks that they want to offer a limited online menu for curbside.

We are also in the process of adding a delivery module into eTab that we think will further expand the reach of that product..

Our next question comes from Andrew Scutt with ROTH Capital..

I actually disconnected for a bit, so if I ask a repeat question, I apologize. My first question is on the e-commerce business. So great, great numbers there, strong growth.

Question is, how many of the customers that you're adding on our new customers versus all customers? And then can you give some commentary on the pipeline there and kind of just how long it takes to on-board a new customer, once they express interest?.

You know that these are - so these are new customers. The, if you could think about it this way, there are new merchants and they are, but many of them are long time distribution partners. We're adding, depending on the month, it's really - 100 to 400 new merchants in that segment.

There has been months where it's been a bit higher, months, when it a little bit lower than 300, but on average that's where it's kind of shaken out over the recent trend. Do not see that abating at all.

And we're pretty optimistic as we, as we've now brought in a super talented Chief Marketing Officer to help drive more growth in those channels as we market the capabilities of Priority more fully that we'll see - we'll see improved results..

So my second question is on the CPX platform, really nice continued growth there.

Can you just kind of speak the dynamics of the market right now? The COVID-19 pandemic still ongoing, and how that's impacting customer leads and on-boarding?.

Sure, sure. It's having - so you can see that the growth has been steady. So that's - year-over-year was just shy of 7% growth. The growth there, you should expect to be a little bit more chunky.

We're having a very good deal of success is down into the, what I'll call the middle markets, so your $100 million revenue to $500 million market segment adopting automated payable solutions and network software partners.

So these are folks that provide accounts payable management or inventory management tools that are looking to add payable solutions or a payment engine to their product stack. And we're seeing fantastic adoption there. We would expect that to be the growth driver moving into the early part of 2021.

On the FI side, so these are treasury, so these would be treasury departments within the banking world. They are slower. So their decision time is typically slow and it's only slowed down more in the pandemic. So we - some months ago just have been pivoting our distribution focus as you might imagine to where the fire is hot.

So we expect - we expect in the near future, you'll see the continued strong results from that distribution focus, and that will provide us with a great deal of latitude as - banks kind of come back around and start reassessing how they want to implement automated payables more deeply into their platforms..

Our next question comes from who is a Private Investor..

First, great job on the quarter, especially given the trying circumstances you're under.

I wanted to lead with both the consumer and CPX ] segment, and thinking through the growth drivers there, it looks like there was a healthy uptick in transaction volumes quarter-over-quarter, but that's seems to be partially offset by a reduction in average ticket sizes.

Although that's still above historic levels on the consumer side, any sense of where both of those counter-plan balancing trends maybe heading as we move into Q4 and beyond?.

Mike, I think you actually provided some statistics on this during your segment. So if you want to - you want to do so and then I can kind of - upon anecdotal..

Sure..

As far as Q4, guys, we kind of see a steady state with this mix and as we get into 2021 and get a vaccine out there and get more normalized economic activity from historical perspective, we probably will see higher number of transactions and maybe lower ticket trying to blend back in.

But in the short term, Q4 is looking like Q3 and it's related to shifts in behavior from the pandemic. Now, it's hard to say how much of those shifts are going to be permanent, right, versus going back to normal levels. But net-net it's had a positive effect on our business, but we're closely monitoring those trends as we go forward.

But again, Q4 is looking like Q3..

Great..

Yes. I might submit it, the early results of October, probably a bit better..

Yes, I'm talking about the - average ticket size and, but you're right, absolutely October is better than September for sure..

On the last call, Mike, I think I understood you had a healthy processing pipeline on the CPX automated payables platform. I think you said it was about $30 billion plus that you are expecting to monetize this quarter.

Is that plan is still on target? Or are you seeing a push back there into future quarters due to COVID resurgence?.

Yes, the large, the large FI channel, we've seen a bit of a push back and that's what was driving a lot of that. Yet, there is still - and Tom's closer to this than I, but with respect to the big FI, we have seen a push back, but we're picking up growth in other avenues..

Okay..

I would comment on it this way. So that the pipeline is still similarly sized, but as I kind of noted in the last response, the bank pipeline is probably a longer cycle to close. So we dedicated our resources to well smaller networks and when I say smaller, we're not talking hundreds of millions.

We're still talking in the billions, but better margins..

Okay..

Because we provide, so these will be network partners where we are - we are not just a payment provider, but we're also that issuing solution as well. Where is a lot of, often with the banks, while we're providing the payment engine, we're not always the issuer, because the bank wants to be the issuer.

So the volumes may be larger, but the offset of margin makes them economically similar in terms of net revenue.

Does that make sense?.

It does. No that's helpful. Thanks, again, Tom.

Given the - turning toward strategic partnerships, and given the prior existing relationship with MRI and sort of the turnkey nature of onboarding new accounts, do you have any update on any progress in terms of incremental penetration into the MRI customer base over the last two months since the acquisition beyond just the Priority existing customer base? Has there been any new growth into their customer base?.

Well, just a - so the - we closed the transaction at the end of September. So we're only a month into it. And right now the early stages are devoted to really ensuring the stability of the platform transition of our customers etc. So we're closely in touch with the group that now constitutes MRI payments, of course they're former employees of Priority.

So fantastic relationship there, fantastic working relationship. And so that I would - I would expect it will have, or I should say, you should anticipate a more realistic timeframe for driving that penetration through the MRI to begin in Q1 2021..

Okay..

There's always new. And just to be clear, there are always new property managers joining the platform, so that - that continuing, the nice thing about MRI, it's an open architecture platform. So the pipeline we had, it was in cross onboarding, it was never disrupted during the transition MRI. So if that makes sense..

It does. And that's helpful. And then if you can elaborate on the progress for two of the other announced partnership specifically Akerna and Citi and possibly elaborate on any progress those relationships have aided into expanding into the international arena, that would be helpful..

Yes. So look, those both had some integration work to do. I would say, the two, Citi and their prop rates for commercial are much closer to launch and the Akerna and MJ Freeway, there is, there are still some integration work that needs to be done by our technology partner as we start to roll that out.

So the growth that you're seeing is independent of those integrated partnerships and pipeline opportunities that are committed to our future platform..

Okay. No, that's fair. And then when we look at....

They're only additive, if I guess, to sum it up..

No, that's great. If I take the numbers that you put out and annualize them and looking at an $80 million plus EBITDA at today's quarterly run rate that would - are you still targeting an 80% conversion rate for free cash flows.

And will that capital allocation be focused more on debt pay down, or in the past I know you've talked about doing more interesting tuck-in acquisitions in the healthcare space? Any color on that as well?.

So Mike, I'll let you comment on the - on the free cash flow conversion. And I would, so the answer to your question is, I would expect it more as deleveraging. And if we have a thoughtful deleveraging acquisition then we'll use the cash for that. If it's - if we don't, we'll use it for debt reduction..

Okay..

Yes. At this point....

Or just debt repayment, I should say - debt repayment..

As far as EBITDA conversion, the free cash flow, we obviously are going to benefit from lower interest costs nicely. But the bad news of becoming profitable, we're going to probably return into being a taxpayer, although we do have some carry forwards remaining to offset that.

But I think, from a modeling perspective, I would keep that conversion at the - at that rate going forward. We'll probably benefit more in the short term, but as we become a taxpayer, it will probably revert back to that 80%..

Perfect. Well, I think I just I want to start housekeeping question.

There was a beta trial that you guys have been developing on a fully integrated omnichannel DLS, is there any update on that or is that already been completed and launched?.

Could you - we have a number of kind of point of sale tools. The core of which is our MX Merchant, which is omnichannel, that's been in place for years.

So is there something more specific you were referring to? Because we do have some product launches in the - in Priority Technology Holdings, which was our cumulus offering, is that what you're referring to? Or was there something else?.

It was related to the eTab offering..

Yes, that would be cumulus, yes, yes..

Okay..

I already thought on. So we're out in beta and we're very much looking forward to 2021 with an aggressive launch of that product. But we want to make sure we have that working seamlessly. It does in great with eTab. So it's not only on premise, it's also the handles curbside and in fact even mobile on-premise.

So a customer can scan a QR code or pop some menu, they can order to table and have food delivered. And then we're adding the delivery module as well right now to the eTab component. So this is going to be - we're excited about that for 2021..

Okay. But again, thanks..

Continuing to get a perspective..

Great. All right, well, great job, guys and keep up the good work. Best wishes and look forward to catching you next quarter. I'll jump back in queue then..

Thank you..

And I'm not showing any further questions at this time, I'd like to turn the call back over to Tom for any closing remarks..

Well, certainly, we'd like to thank, everyone for their attendance and for the support of Priority. We've tried to reflect over the past couple of quarters.

We know the job at hand and we are laser-focused on driving results, and look forward to continuing to do so through the fourth quarter and having a great story to tell when - when we wrap up the year. So appreciate everyone and stay safe - stay safe out there. Thank you very much..

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day..