Good day, and thank you for standing by, and welcome to the Priority Technology Holdings' First Quarter 2021 Earnings Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dave Faupel. Please go ahead.

Thank you, Victor. Good morning, and thanks, everyone, for joining us today. With me on the call are Tom Priore, Chairman and Chief Executive Officer of Priority Technology Holdings, and Mike Vollkommer, 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 involves 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.

Thank you, Dave, and thanks to everyone for joining us for our first quarter earnings call. I would like to begin this morning's call by providing a brief overview of our strong growth in Q1, and how we're positioning Priority for success for the remainder of 2021 and over the long term. I'll also provide an update on the Finxera acquisition and related debt financing in perpetual preferred investment from Ares Capital Management. Following Mike's financial review of our first quarter results and the improvement on our balance sheet, we would like to offer some perspective on our brief history as a public company, post Finxera financial metrics, and our positioning for the future. There are a few quick highlights I'd like to share upfront. As we outlined in our earnings release, the growth trajectory we've established with the pandemic last year continued in the first quarter of 2021. We met or exceeded forecast across key metrics including revenue, gross profit, and adjusted EBITDA. On a purely organic basis comparing our first quarter 2021 results with our first quarter 2020 results, which excludes the RentPayments business that was sold in September 2020. Revenue of $113.3 million increased 21.7%. Gross profit increased 16% to $31.4 million and adjusted EBITDA increased 37% to $18 million. These excellent financial results were underpinned by nearly 13% increase in total bankcard processing volume to $11.9 billion for the quarter, and approximately 8% year-over-year merchant growth in the Acquiring segment. A 2% outperformance to budget in commercial payments revenue, and a 17% outperformance in integrated partners EBITDA contributions. In conjunction with our strong financial results, we recently closed the refinancing of our existing debt, which reduces our interest expense by approximately $3 million per year. We also added a delayed-draw facility and perpetual preferred investment of up to $250 million from Ares Capital Management to help finance the pending Finxera acquisition and provide us dry powder for further acquisitions. With regards to the status of the Finxera closing, the key execution items are in place and the combination remains on track for Q3 to close. As noted previously, the financing for closing is locked down, and the regulatory process for the transfer of the money transmission licenses is progressing smoothly.

Thank you, Tom, and good morning. Yesterday's press release provides highlights of our first quarter 2021 results compared with first quarter 2020 on a GAAP basis. Those comparisons include first quarter 2020 results for the RentPayment business sold to MRI in September of last year. It also includes certain non-recurring expenses in both quarters as we describe in our press release. In order to provide comparability of ongoing business performance, my comments will focus on amounts that exclude RentPayment from the 2020 first quarter and excludes the non-recurring expenses from both quarters. This comparison of non-GAAP results is not a substitute for prominent comparisons under GAAP rather my comments are meant to be a complement to understanding the GAAP-based comparisons. Yesterday's press release provides reconciliations of GAAP to non-GAAP amounts and also provides details of the RentPayment first quarter 2020 results and the non-recurring expenses in both quarters. In the first quarter of 2021, consolidated revenue was $113.3 million, a 21.7% increase from $93.1 million in the 2020 quarter. During the first quarter of 2021, our diverse distribution channels continued strong new merchant boarding. Over 14,600 merchants were added with nearly 5,100 coming on board in March. Gross profit was $31.4 million, a 16% increase from $27 million in the 2020 quarter. Gross profit margin was 27.7%. We planned for Q1 margin reduction and our anticipated volume mix was a factor in that plan. Income from operations of $8.2 million was a 132.9% improvement over $3.5 million in the 2020 quarter. And as Tom mentioned, the adjusted EBITDA of $18 million increased 37% from $13.1 million in the 2020 quarter. Now let's break this down within the segments. Consumer payments revenue was $108.4 million, this is a 26% increase over $86 million in the 2020 quarter. Growth was driven by $9.7 million or 372% revenue growth from high margin specialized e-commerce merchants and $12.7 million or 15.2% revenue growth in our base consumer payments business. Merchant bankcard volume in this segment processed was $11.9 billion. This is a 14.3% increase over $10.4 billion in the 2020 quarter. Merchant bankcard transactions of $127.5 million increased 6.7% from $119.4 million in the 2020 quarter.

Thanks, Mike. As Mike shared, on the heels of an excellent finish to 2020, we had an extremely strong start to 2021. Despite the pandemic, 2020 will be regarded as Priority's year of transformation, and the realization of our mission to emerge as a payments powerhouse with a single platform to collect, store and send money that delivers differentiated products to our existing verticals. At the same time, we are well equipped to activate new solutions including payment facilitation into new market segments quickly and at scale. In the near term, you will see Priority roll out in-house settlement processing and international payments, both of which represent significant long-term growth opportunities. We recognize our plans are bold, but we have a platform and the personnel currently in place to execute. Now none of this would have been possible without the Priority team's focus and resilience. Shortly after Priority became a public company in 2018, payment network rule changes resulted in the temporary loss of over $100 million in annual revenue and $20 million in EBITDA. It was not easy, but the team managed through it and we are now on the other side with all signs pointing upward. Diligently focusing on delivering a differentiated product and service experience to our SMB acquiring clients and building out countercyclical payment segments in B2B, health care, mobile hospitality, and of course real estate. It enabled us to grow top line and bottom line results through 2020's COVID environment. Importantly, we proved out the differentiation of our payments operating platform with the successful monetization of the RentPayment's asset at a 19x EBITDA multiple, which helped to reduce debt by over $120 million. As Mike highlighted in his financial remarks, Priority has continued to move from strength to strength in 2021. We are proud of…

Our first question comes from the line of Brian Kinstlinger from Alliance Global.

Great. Nice results. Can you comment on the lower e-commerce transaction volume during the March quarter that you said was planned, should we expect a return to the second half '20 mix or has something changed that will keep the mix of e-commerce and gross margin and the consumer payments business lower going forward?

Well, a couple of factors, Brian. So I would say we would expect the mix to be a little bit more weighted to card present just because of the fact that more of the economy is opening up, people becoming vaccinated are more comfortable and we're seeing very, very substantial growth in our retail trade segment, and that is mostly card present. Nevertheless, we do expect our e-com segment to re-establish its growth trajectory. We shut down some merchants that we did not feel were operating to the standard we would expect, and that is going to happen from time to time in this segment. So it was a -- one of the reasons why we did expect it was -- we knew we would see a bit of compression from the pairing of those merchants but felt like that would put us ahead of the game long term as a risk mitigation with some transaction activity that was, I'll just say had some unfavorable markers when we look at it from a regulatory standpoint.

And so to that end, pre-Finxera acquisition the margins will be in the high 20s as a result of both of those dynamics, is that how we should think about it?

I would say in that in that neighborhood. Mike, I don't know if you would voice it differently, but I would offer this to you from a modeling standpoint that would be a conservative view that can only improve.

Yes, I would agree with that. And -- but bankcard volume in specialized merchant grew in Q1 over Q4 of last year. That's the same trajectory that we had been seeing in the earlier quarters but -- and again, card volume in -- with those merchants is only a component of what drives the revenue, right. But we did have growth. So I can circle back with you if -- to see why you think we had decline in total volume.

Okay. And then on the CPX B2B payables technology, what do you see as the catalyst for accelerating growth -- revenue growth here? You mentioned, I was a little bit confused, 100% and 200% increases I think in sales, but I'm looking at the total dollars and they're up marginally, so maybe I missed on why CPX revenue growth is so modest and is it more sales people, more development needed, is it sales cycles, revenue recognition? Just maybe a sense for what's going to lead to the acceleration of that platform?

Yes. That was -- that's the volume growth in those channels, which is continuing, and actually, the pipeline is looking very strong. The reason why that didn't equate into the higher revenue growth in Q1 versus Q1 of last year was one of our customers, which was, I'd say, richly priced a year ago became -- we repriced that contract more in line with the market overall with our other customer base. So it was just a one customer that had some decent volume that kind of suppressed the amount of growth that we experienced. But the momentum is strong, that's why we -- I cited those volume growth quarter-over-quarter and the pipeline is building. And then...

I would just offer to you just further on that point. I'm sorry. Just the -- as far as the distribution, when you look at kind of our previous pipeline had been largely focused on the FI community and during the pandemic they just didn't launch anything, right. They just didn't have the personnel to do it. So we quickly adapted, and our sales initiatives are -- that are kind of poised to tip our direct to customer and ISV. But we've -- we're very confident in the pipeline that's already either in contract negotiation or been contracted and has yet to launch.

Great. Last question and I'll get back in the queue with some others. While the Finxera acquisition hasn't closed you talked about you're going thought preparations, have you begun to approach customers about the new banking offering that can be obviously cross-sold, and if so can you just talk about the response and how that's being accepted with your customer base?

Yes. I appreciate the question. The response has been fantastic. So we are already in discussions with existing customers as to how they're going to implement payment facilitation into their platforms with existing ISVs. We've opened up new channels with for instance companies that are in the money-sending business are realizing we are a much more efficient platform to -- on which to operate because we consolidate a lot of their connections that now are into 5, 6, 7 banks into 1 connection that takes them directly to the Fed. And then can deploy to their endpoints much more efficiently. So -- and those are just 2 examples. I think we already noted in our initial comments around Finxera that we'd be more deeply penetrating the real estate space. That's happening. We are prepped to launch that solution into our MRI relationship, and then we'll immediately start working on an adjacent solution in -- to handle deposit accounts for securities -- security deposits, et cetera for that segment. So we've got a roadmap that the team is already outlining and working on together. And that's just frankly, touching the -- like just scratching the surface. We have projects that are customer-driven across the board in acquiring and commercial that are implementing a combination of our payment solution with virtual banking or electronic wallet however, you want to think about it. So we're -- we intended to hit the ground running and that's happened.

Our next question comes from the line of Andrew Scutt from ROTH Capital Partners.

First question, can you just provide some additional comments on the supplier enablement product that you guys talked to in the B2B business where you said it would generate about $4 million in annual revenue, which should be substantial in the commercial payments business kind of if you talked to customers what their feedback has been and cadence of rollouts that we can expect over the rest of the year?

Sure. That's for -- obviously, we have a big relationship with American Express and that's an American Express program. They came to us and said, we want you to do a supplier enablement. So what that does is, it has us working with their merchants to take -- to use American Express card to pay certain of their payables. So when we say supplier enablement, we're enabling the suppliers and those merchants to use Amex cards for payments of bills. It's ramping now. We need people in seats to make that program, to get it going and we're staffing up. So we're going to start to see those results coming on in Q2 and it will be fully ramped and there'll be $4 million -- we estimate a run rate of about $4 million annually.

And maybe to put a fine point on it, it's contracted. The heads are contracted. We are just filling the seats with salespeople, and that is moving at the pace of our expectations. So we just keep those seats filled, and the revenue will be spot on with the $4 million that Mike referenced. We actually are optimistic that, that will grow from there, which has historically been the case and that's also what's sort of been kind of voiced over to us that we'll get this first phase off the ground, and then we can grow from there based on results.

Great. That was very helpful. Second question here, you -- I mean, provided some update on the progress of onboarding the former RentPayment's clients on MRI, I know you guys have been doing a good job, especially in the last quarter, and maybe if you can provide a revenue contribution in the quarter from that?

Yes. I think Mike, you had mentioned that number. Do you want to just review it again?

Yes, that was $700,000 of revenue in the quarter. And I don't have specific numbers on penetrating MRI's existing customer base, but it's a 10-fold opportunity. We've been up until this day focused on the renters that were our customers, but we will be moving into expanding that internationally over the coming quarters.

Yes, just to give you some sense. The transaction closed in September, so between now and the, let's call, we really got working in earnest in October after everyone sort of found their seats over at MRI, we are moving all of the existing platform over and we expect that to be done in, call it, the June, July time frame. And then we'll start going after more aggressively the remainder of the book. And to Mike's comment of it being a 10-fold sort of increase in opportunity, at the time of the transaction, we had about 1 million renters that had access to rentpayment.com. And at that moment -- and they've been growing by about 20% to 25% a year, at that moment there were 12.5 million renters on MRI's platform. So we'll begin that in earnest through the summer months.

Great. Yes, that's a very exciting opportunity. Another question for me, kind of piggybacking off the first question. So you guys have seen positive trends that you said in card-not-present transactions despite the little blip in dropping some e-commerce customers this quarter's strong momentum in e-commerce, but gross margins were down pretty substantially, so were there any kind of one-time items in there or something that will not be reoccurring so we can expect to see you guys rebound to over 30% gross margins?

Mike, I'll let you weigh in.

Yes, that's fine. You have to look at our margins excluding the RentPayment for comparison. But then because that was a high margin revenue for us that helped in -- with our margin percentage. If you take a look at the pro forma that we -- where we're headed with the new Priority, if you will, with Finxera we put those pro forma numbers in for first quarter. We're -- Pro forma basis were upwards approaching 40% gross profit margins. So I think the -- on an organic basis, the margins are in the upper-20s where we had this quarter, but once we bring Finxera in, just on their historical book of business, we are pushing 40% overall. And as we grow and leverage that technology, that's a high margin business as well.

Our next question comes from the line George Mihalos from Cowen.

Congrats on a nice quarter. Tom, nice to see that things are moving along in terms of -- from a pro forma perspective with Finxera, but just curious if you could maybe dimensionalize for us how big of a synergy opportunity that could be for the company, maybe at a high level what you're sort of thinking those contributions could look like realizing that they're obviously not in your pro forma outlook?

Well, so George, actually the -- so let me talk about expense versus revenue. Okay. The expense synergies are really very straightforward when you are talking about the very basics of SG&A. We feel very comfortable. And these are not personnel declines where we are getting rid of people through the acquisition, but rather we have some budgeted heads we would add as a stand-alone that we no longer need to because they will be filled by a Finxera technologist, for instance. So between that some already contracted reductions on the management side and very straightforward SG&A combining auditors, legal expense things like this, insurance et cetera we're very comfortably going to hit $5 million of expense synergies. And that's what we've projected. But in the pro forma that we've just discussed or even the pro formas we've communicated to the market, we have not included any revenue synergies and I'll just give you 2 very simple examples. One of the most -- let's just take at a logical level, the lifeblood of any small business is cash, cash flow acceleration, right. And Square Cash, their Cash App charges 1% for the acceleration of cash, okay. There are other some banks who offer, what they call, immediate funding or same-day funding for $20 a month. Well, if we just had penetration of 10% on our 200,000 plus merchants for instant funding where you open up a bank account. Of course, we have that -- they have that ability now to create virtual accounts linked to every merchant account. So when you sign up for merchant processing with Priority you can get an immediate funding bank account, FDIC insured. So the minute it hits our settlement account, it gets credited over to the operating account of a small merchant. If we…

And I'd just add to that, just to be clear, that in that pro forma we also did not add in any of those expense synergies either.

Okay. That's great. Appreciate that color. I mean just sort of a quick follow-up. The 5,000 plus merchants that you've onboarded in March, can you talk a little bit about some color around those verticals or anything that sort of stands out to you in terms of that onboarding process? And again, congrats on the quarter.

Yes. It's steady issue, goes across the board on onboarding. I mean we've got -- we're constantly selling into all our vertical markets, and so there is nothing that's unusual. It's just our normal cadence at that level. And it's just -- we pointed out March in particular because it was the strongest month of the quarter but it's across the board.

Yes. George, just to put some granularity on it. And I apologize I didn't realize I was on mute, so thanks for jumping in Mike. The -- if you look at our book generally we're mid-teens, legal services high-teens, hospitality kind of 7, 8-ish percent in health care and health care providers kind of similarly situated in the salon space and wholesale trade probably makes up 10% to 12%. So the boarding has sort of been consistent with those trends. We have a very diverse sales channel or set of sales channels. And collectively that's what sort of tends to come in and we haven't seen a lot of volatility in that frankly over the last few years. The one area that probably, which you already know, right, is in specialized acquiring and the e-commerce segments that really have more of a high compliance bar that we have some unique tools that make us very effective there. That's still growing at a rate higher than kind of to sort of reapproach back where we were in '18.

Our next question from the line of Brian Kinstlinger from Alliance Global.

Great. One follow-up with the increased merchants onboarded, you've got inflation where prices on everything across the board in goods and services are going up, is there any reason to believe -- and we've seen -- and you've obviously seen the first half of second quarter play out, is there any reason to believe that we won't see growth on the consumer side in June versus the March quarter?

Certainly, nothing we can see. Right now we feel very comfortable in the trends we have in place. As we reflected kind of earlier in 2020, right we thought that the fact that we were continuing to sell-through the COVID period would be a catalyst for growth as all that volume turned on right, and that's -- we're still delivering on at certainly the same rate, and most months at above trend rate.

We have another follow-up from Andrew Scutt from ROTH Capital.

Yes. Two quick follow-ups from me. So first, congrats on the -- completing the refinancing in the preferred issuance, I know you guys have $50 million preferred that's available for an additional acquisition, you guys have some dry powder from the refi, can you just talk about what you're seeing in the market and if there is anything specific you're looking for in a potential acquisition?

I would say nothing that's changed from the segments we've kind of been interested in the last few years. We have a pretty strong presence, particularly in the down market area of the acquiring space. When smaller ISOs and resellers are looking to monetize their business, we're certainly one of the calls that are made. So we're going to -- we see opportunities there, and we see those on a regular basis. Unless -- there is nothing I see on the horizon there that would be, what I would consider, transformational in the acquiring space. We're focusing more of our attention, the Finxera is a pretty good example of it is -- look, we already think we have a great acquiring business that is uniquely situated to perform. So opportunities where we can pick up countercyclical assets with technology that enhances our core offering, those are the ones that are most appealing and those have tended to be in more verticalized strategies, good examples being real estate, Finxera, of course, and consumer finance area and CFTPay. And we'll certainly have our eyes open around the B2B space for the right types of opportunities that fit our profile. So that's where our greatest interest lies because they best complement the acquiring business that we have that we feel very confident in growing organically. I would note that we're pretty disciplined in the way we go out and acquire things. I mean you look at the MRI transaction we executed in and what we did with the RentPayment asset, those -- that was purchased for -- in a very favorable structure for Priority at maybe, let's say, less than 10x EBITDA. And we were able to really reposition that and improve its efficiency and exit that at 19x EBITDA. So we'll certainly…

Really appreciate the detail there. And last, if I may, just kind of housekeeping. On the Finxera color you guys offered an annual guide of $450 million to $470 million in revenue and $70 million to $80 million in EBITDA on the full year and it looks like you guys are going to meet those numbers organically and then you touched on the pro forma numbers for Finxera, just an extra added bonus, so I just want to make sure you guys are still comfortable with those numbers with the organic growth?

We had -- we exceeded our plan in Q1, so it just gives us greater comfort on those organic numbers that we put out.

And I'll now turn the call over to Tom Priore for any closing remarks.

Well, I just want to once again thank everyone for the time and certainly the line of questioning to understand not just the quarter but where our business is headed and we appreciate everyone's support in that mission. I hope everyone has a great remainder of the week and weekend, and thank you once again. Take care, everyone.

This concludes today's conference call. Thank you for participating. You may now disconnect.