Priority Technology Holdings Inc (PRTH) 2019 Q1 法說會逐字稿

Operator, are we live?

We are live.

Okay. Good morning, and thank you for joining us today. 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 that 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 29, 2019. Any forward-looking statements that we make today are only as of today's date and we undertake no obligation to publically update or review any forward-looking statements. Additionally, we may refer to non-GAAP measures including EBITDA, adjusted EBITDA, and earnout adjusted EBITDA during the call.

Please refer to our public filings and disclosures including those referenced in our press release announced in this call for definitions of our non-GAAP measures and the reconciliation of these measures to net income. We have also provided an accompanying presentation with today's call that will help us more clearly articulate our results and go-forward strategy.

With that, I would now like to turn the call over to our Chairman and CEO, Tom Priore.

Thank you, Chris, and thanks to everyone for joining us.

Before we begin, I'd like to briefly mention how much I appreciate everyone's flexibility with moving the earnings call to today. Sadly, we experienced a death in our family early last week and the services conflicted with our earnings schedule. Thank you, all, for making this new date work for your schedules; I know your time is valuable.

Our first quarter 2019 results clearly demonstrate the strength of our business foundation but still reflect the impact from the change in the subscription billion ecommerce business. Consolidated revenue of $100 million during the quarter fell 13.5% from prior-year first quarter.

As noted in prior quarters, this decline was driven by prudent risk management decisions last year when we chose to close the accounts of roughly 1,200 merchants to ensure compliance and good standing with MasterCard's subscription ecommerce criteria. It's worthy to note that we have since reestablished our boarding activity in this segment.

Adjusted consolidated revenue, which excludes the impact of the subscription billing ecommerce merchants grew $12.1 million to $96.1 million in the quarter, a healthy 14.5% improvement compared with $83.9 million for the first quarter of 2018. Gross profit margin for the quarter -- an important metric for Priority -- increased 290 basis points to 27.5% from 24.6%.

In a few minutes, Mike will provide greater detail on our first quarter 2019 results. Before he does, I'd like to discuss the success we're experiencing in several key areas of the business including the significant acquisitions and new partnerships we've completed in the recent past.

To set the stage for these comments, I believe it's important to establish a bit of context. In prior years, we've strategically aligned Priority to capitalize on an anticipated convergence of software and payments by creating a purpose-built cloud platform where applications for payments and payment-adjacent product reside. The integrated partners channel is the structural manifestation of that vision and we are leveraging our platform in many other areas of our business as well.

With that said, there are three distinct areas I'd like to highlight where this strategy is producing exciting results. Let's start with our core acquiring business. Our consumer payments business is being driven by our MX platform, both MX Merchant and MX Connect, and ISO/Agent. Despite the headwinds caused by the pause in the subscription billing ecommerce business, merchant bank card volume processed in the first quarter of $9.9 billion grew by 8.7% compared with $9.1 billion in the first quarter of 2018, and merchant bank card transaction volume of $117.8 million grew by nearly 7% from $110.4 million in the first quarter of 2018.

We're also pleased to see average ticket of 83.82 grow roughly 2% year-over-year. Overall, new merchant boarding was steady at approximately 4,000 per month and portfolio attrition remains one of the lowest rates in the industry.

The segment was further complemented by our fourth quarter acquisition of Direct Connect Merchant Services and Blue Parasol Group's merchant portfolio assets. As part of the transaction, Priority had a diverse and low-risk merchant portfolio processing $1.7 billion in annual volume as well as a productive sales engine contributing to our enterprise growth.

Direct Connect's increasing focus on software integrated payments perfectly aligned with our technology-oriented growth strategy, and the strong sales relationships we gained will increase diversification across industries, geographies, and merchant sizes.

During its brief integration into Priority's infrastructure, Direct Connect's merchant boarding has already doubled and resellers are quickly realizing how much simpler it is to get business done at Priority. We expect to continue to driving similar levels of growth as we deepen relationships with these new resellers and introduce new products to their networks.

Building on our efforts to grow the business organically, a key part of Priority's acquisition strategy remains focused on identifying accretive purchases within existing and new sales channels designed to improve earnings and lock in long-term revenue and sales commitments with independent resellers and integrated software partnerships. The company continued purchases of merchant portfolios in the first quarter of 2019 with the execution of a handful of tuck-in acquisitions.

Moving onto commercial payments in our managed services segment, commercial payments revenue of $1.5 million in the first quarter increased 54.2% compared with 2018's first quarter, and managed services revenue of $5.5 million was in line with the first quarter of last year.

Although it's taken longer than initially expected, the commercial payments business continues to steadily gain momentum. Leveraging the platform we built years ago, our CPX automated payables technology has provided the foundation for this segment of our business.

Commercial merchant bank card volume increased 25.9% in the quarter compared to the prior-year period, and we recorded and all time monthly volume record in April. Current and potential customers are recognizing the strength of our platform as we continue to win some of the most sought after contracts in the B2B payments space. Pleased with the traction we're seeing, we will remain focused on optimizing the platform as the industry further realizes the cost and efficiency benefits of converting to automated payables and electronic payments in this segment.

Currently, our total payment volume either under contract or being negotiated is just shy of $45 billion in annual processing volume setting the stage for continued success. Looking ahead, we'll continue to develop greater insight and knowledge of the commercial payment segment in order to accurately forecast implementation timelines in the sector, maintaining our conservative approach.

The third and final segment we want to discuss is our integrated partners business which has become increasingly exciting, given current industry dynamics as well as the significant growth within Priority. As one of the fastest growing segments in the payments ecosystem, integrated payment solutions provide an opportunity for Priority to capitalize on the intersection between software as of service and payments opportunities. Our purpose-built platform's exceptional agility allows us to execute quick turnarounds and furthering our competitive edge.

Although we only formed integrated partners a little more than six months ago it was able to generate 3.2 million in revenue during the first quarter alone. To put that in perspective, integrated partners made up roughly 6% the company's total gross profit during the period and that only included one month of contribution from the recent Yapstone partnership.

As I've said previously, this part of the business remains a critical component of Priority's future and exemplifies why we view ourselves more as a fintech enterprise with strong core payments technology than a traditional payment processor or merchant acquirer. Our established SaaS product platform in real estate, healthcare and hospitality verticals represents a clear competitive advantage and a strong foundation upon which to build.

So let's talk about the success of our recent acquisition and partnerships in this segment. As you know, our investment approach is to identify markets where there's a meaningful transition -- from check to electronic payment -- or represents an under optimized segment of our existing portfolio.

Most recently Priority hospitality technology was formed to provide technology solutions to the hospitality marketplace. Priority's portfolio of approximately 32,000 hospitality merchants has been historically underserved with proprietary product offerings. We are strategically solving that problem with integrated point of sale and an order ahead product suite that can be sold as a full package or individually to these merchants in our existing portfolio and new targets. Since formation we've seen merchant boarding more than double in this segment.

Even better is the momentum we've seen with adoption of our new eTab product. In the first two months of operations on Priority's platform, merchant boarding of eTab has increased from 15 prior to its inclusion into the Priority integrated partners channel to over 160, or nearly a 1,000% increase. It is still early days but the trends are encouraging and well ahead of expectation.

On the healthcare front, Priority Payright has begun to hit its stride and is well positioned for rapid growth. We have been diligently building the foundation of the business through integrations with multiple practice management systems, including Dentrix, EagleSoft, and most recently NextGen, with a number of others to follow closely in the coming months.

Some performance highlights of Payright's year over year performance include a 683% increase in third party payer volume, a 211% increase in Payright's payment gateway processing volume, a 174% increase in portfolio residuals, a 65% increase in gross statement revenue, and an approximately 157% increase in total gross revenue and 277% increase in net revenue. Lastly, as reported in the press, we've continue to extend our footprint in real estate payments, a segment where nearly 80% of rent payment are still made by check.

Building on the strength of our prior acquisitions of RadPad and Landlord Station, Yapstone entrusted us with their rent payments technology through the formation of an operating partnership with Priority Real Estate Technology. Priority is the majority owner of the partnership and it is assuming responsibility for the management and the daily operations of the newly combined business.

In addition to managing the new entity, PRET will provide critical operating and infrastructure marketing and sales support and real estate technology assets, including products and services derived from RadPad and Landlord Station. Not only do those two acquisitions give us the ability to enable small- and mid-size landlords and property managers to access tools normally only available to large enterprises, but they also gave us the legitimacy necessary to partner with a proven industry leader in the real estate vertical.

Yapstone will continue to provide credit and debit card processing to the new entity, continuing its leading real estate payment processing technology as well as the extensive property management contracts and customer relationships in the rent, storage and dues markets. Additionally, Yapstone will maintain a significant minority stake in the new entity and will serve on the board of Priority Real Estate Technology.

Combining Yapstone's market-leading enterprise offering that maintains payment feature integrations to Yardi, RealPage, MRI and a host of other rent, dues and storage management software, with the foundation we had already created, PRET possesses a single platform that addresses the needs of the full spectrum of landlord constituents, from integrated enterprise property managers, managers like the largest REITS in the country, and middle market partners to small and local landlords for rent dues, and storage processing along with a whole host of other property management needs.

This partnership aligns nicely with our integrated payments solution strategy in a key industry vertical and we expect it to generate more than 10 million in EBITDA over the next 12 months. This opportunity should only increase as we expand our sales and marketing efforts. Longer term, it's our view that the enterprise rent payment clients can also benefit from our commercial payments segment by providing them with the efficiencies and cost savings of a single consolidated platform, both to take payments for rent and make payments to their vendors through our automated payables offering. However, cross selling opportunities like these have not been factored into our financial projections.

Not only are we excited by the growth we're seeing in these businesses but their operating margins beat those of traditional payment processors as well as SaaS based models. Expanding on these results and the platform we've built, including our Yapstone partnership in the real estate segment, we expect continued success in the integrated partners vertical.

Before wrapping up, I know many of you are following the broader B2B payment space, including the recent acquisitions of Nvoicepay by Fleetcor and Transactis by MasterCard, which occurred in the past week or so. According to those engaged in these transactions, valuations for B2B payment assets have ranged between eight to 12 times revenue. Our B2B payments revenue was approximately 28 million over the past 12 months, which correlates to substantial enterprise value being built in the segment. I reference these recent data points to highlight that the market clearly recognizes the significant opportunity in commercial payments, reinforcing the long term view we see throughout our business as well.

In summary, our confidence in the business remains high and we believe we're exceptionally well positioned for the long term. Consistency and growth in volumes despite situational headwinds, accelerating penetration into new markets like commercial payments and integrated payment verticals along with attrition rates at half the industry average reinforce conviction in our long term strategy and ability to drive exceptional value for shareholders. We look forward to sharing further updates and stories of progress in the quarters ahead.

I'd now like to ask Mike Vollkommer to provide further information on our first quarter results. Mike?

Thank you, Tom, and good morning. I'll review the first quarter consolidated results along with additional comments on the segment performance.

Throughout my summary I will cite both GAAP and non-GAAP measures. Today's press release provides a reconciliation of these non-GAAP measures to the GAAP measures. Similar to last quarter we've also provided a supplemental set of slides that is available on the IR portion of our website. These slides provide a summary of our numbers today.

Consolidated revenue in the first quarter of 2019 amounted to $100 million, a decline of $15.6 million, compared with the 2018 first quarter. The comparative revenue has continued to be negatively affected by the wind down of high margin accounts with certain subscription billing e-commerce merchants.

This revenue, comprised entirely within the consumer payment segment, was $3.9 million and $31.7 million in the first quarters of 2019 and 2018, respectively. As Tom mentioned, adjusted consolidated revenue of $96.1 million, which excludes the impact of these merchants, increased $12.1 million or 14.5%.

Total merchant bank card volume processed in the first quarter of 2019, of $9.9 billion grew by 8.8%, as compared with $9.1 billion in the first quarter of 2018. Merchant bank card transaction volume of $117.9 million in the first quarter of 2019 grew by 6.7%, as compared with $110.4 million in the 2018 quarter.

The consumer payments segment revenue in the first quarter of the 2019 amounted to $89.8 million, a decline of $19.2 million, compared with the 2018 first quarter. Adjusted consolidated revenue in this segment increased $8.6 million, or 11.1%. The commercial payments in managed services segment revenue in the first quarter of 2019 amounted to $10.2 million, a 53.5% increase over $6.6 million in the 2018 first quarter.

The first quarter of 2019 revenue in this segment includes $3.2 million from the recently established integrated partners businesses. Commercial payments revenue of $1.5 million in the first quarter increased 54.2%, compared with the 2018 first quarter. And the managed services revenue of $5.5 million in the first quarter of 2019 approximated the 2018 quarter.

Gross profit in the first quarter of 2019 declined by approximately $900,000, from $28.4 million to $27.5 million, while gross profit margin increased 290 basis points, from 24.6% to 27.5%. The Company's non-GAAP gross profit metric represents consolidated revenue, less cost of merchant card fees and other costs of services.

Both gross profit and income from operations associated with the subscription billing e-commerce merchants, was $1.6 million in the first quarter of 2019, compared with $10 million in the first quarter of 2018. Excluding the e-commerce merchants in both periods, adjusted gross profit increased by $7.5 million, from $18.4 million to $25.9 million and adjusted gross profit margin increased 510 basis points, from 21.9% to 27%.

Consolidated income from operations was $1 million in first quarter 2019, compared with $7.9 million in the 2018 first quarter. This decline of $6.9 million is due to four factors, a decrease in gross profit of $0.9 million, an increase in depreciation and amortization of $5.2 million, an increase in salaries and employee benefits of $1.9 million, which will partially offset by a decrease in SG&A expenses of $1 million.

Please note that the SG&A included $1.2 million of non-recurring expenses in the first quarter of 2019 and $3.3 million of non-recurring expenses in the first quarter of 2018. Non-cash equity base comp of $1.2 million is included in salaries and employee benefits, and that increased $1 million quarter over quarter.

The consumer payment segment income from operations in the first quarter of 2019 amounted to $7.7 million, a decline of $7.5 million, compared with the 2018 first quarter. Income from operations related to the subscription billion e-commerce merchants declined $8.4. Depreciation and amortization of $7.8 million in the first quarter of 2019 increased $4.4 million, compared with $3.4 million in the first quarter of 2018.

And that's due largely to amortization related to merchant portfolio acquisitions, subsequent to the first quarter of 2018. The consumer payment segment adjusted income from operations, which excludes the impact of subscription billing e-commerce merchants, grew 17.7%.

The commercial payments and managed services segment loss from operations in the first quarter of 2019 was $0.7 million, due to $0.8 million of depreciation and amortization. This compares with an operating loss of $0.3 million in the first quarter of 2018, which included depreciation and amortization of approximately $100,000.

This increased depreciation and amortization is attributable to the amortization of intangible assets related to integrated partner acquisitions subsequent to the first quarter of 2018. Corporate expense in the first quarter of 2019 amounted to $6.1 million, compared with $7 million in the first quarter of 2018.

As mentioned earlier, non-recurring expenses amounted to $1.2 million and $3.3 million in the first quarters of '19 and '18, respectively, and those expenses are reflected in the corporate expense. Interest expense of $9.4 million in the first quarter of 2019 increased by $2.4 million, from $6.9 million in the 2018 first quarter.

This increase is due to higher outstanding borrowings, driven by acquisition financing. On December 24 in 2018, the third amendment to the Company's senior secured credit facility increased borrowings by $60 million. The third amendment also allowed for a delayed draw of an additional $70 million, which was drawn and used to fund acquisitions in March 2019.

Other income net of $0.2 million in the first quarter of 2019 compares with other expense net of $4.1 million in the first quarter of 2018. As you recall, the 2018 quarter includes $3.5 million of expense, related to the change in fair value of the Goldman Sachs warrant, and $0.8 million of debt modification costs.

The effective income tax benefit rate for the first quarter of '19 was 21.1%, which is higher than the rates discussed in our fourth quarter 2018 call. The 21.1% rate incorporates the impact of the March 2019 acquisitions and more closely aligns with the overall statutory tax rates.

Consolidated adjusted EBITDA of $12.5 million in the first quarter of 2019 decreased $2.8 million, compared with the 2018 first quarter. Now, the Company's non-GAAP consolidated adjusted EBITDA measure is earnings before interest, taxes, depreciation and amortization, further adjusted for non-cash compensation and certain expenses considered non-recurring. Consolidated adjusted EBITDA, excluding the impact of subscription billing e-commerce merchants was $10.8 million in the first quarter of 2019, and that's an increase of $5.6 million, compared with the $2018 first quarter.

In our last earnings call, we provided guidance of modest revenue growth in 2019, despite a forecasted $50 million gross revenue decline from the subscription e-commerce business year over year, and a target earn-out adjusted EBITDA of $75 million for the full-year. We remain confident in our ability to achieve these results.

Now I'd like to turn the call back over to Tom.

Thank you, Mike. Operator, we'll now open the line for questions.

Thank you. (Operator Instructions).

George Mihalos with Cowen.

Hey, good morning guys. A couple of questions. Maybe just starting off on the consumer side, the 11% adjusted growth, can you help us with how much of an impact acquisitions had in the first quarter specifically on the consumer side?

I can take that one, Tom. Yes, on the consumer side Direct Connect added about $1.8 million of revenue in the first quarter.

Okay. So you're back to growing at least high single digit then organically. Is that a good way to think about how the business is trending?

Yes. The first quarter was a very difficult comparative quarter with respect that that subscription billion ecommerce business. While that will still be a bit of a headwind, we've outgrown that going into the second quarter.

Okay. That's great. And then as it relates to the ecomm business, if you guys can talk a little bit about your efforts to re-ramp some of that. How is that tracking?

And then Mike, when we look at the margin contribution -- the gross profit contribution I guess I should say from the ecomm side, it looks like the gross margins were about 41.5% 1Q 2019 versus 31.7% a year ago just looking at ecomm. Just anything to kind of read into that or okay, maybe talk about why it's that much higher now?

Well, the ecommerce--

Mike, why don't you take the -- I'll comment on our boarding trends and if you can pick up the margin discussion.

Sure. So I'll start with the margin discussion. But in that ecommerce business the margin -- the revenue and the profit is a big mix of chargebacks. And there's a tail on the charge back activity.

So what we're seeing as Q1 '19 versus '18 is a bigger mix of charge back, which is hot -- which is practically pure profit. So while it's much smaller activity, the mix is what's striving those margins. But you can't really look at that indicative of that line of business and how it performs. It's just the nature of the chargeback blend and mix.

And, George, with regards to the activity in the segments, we absolutely have reestablished boarding in this segment. We've made very conservative assumptions as to its contribution.

One of the primary drivers of the boarding in this segment is integrations to some of the CRMs and their adoption by some of our bank partners. And we've increased the number of those integrations that are now registered with our banks. So we expect that to help the trend within the segment.

Okay that's very helpful. And just a couple more if I may. If we look at the contribution, the Yapstone contribution to the adjusted pro forma EBITDA, what exactly was that that's embedded in that $15.6 million number? And then how should we think about the delta between the pro forma adjusted EBITDA and the Adjusted EBITDA as we go through the year?

So the $15.6 million, that's the earn out Adjusted EBITDA in the press release, it assumes as if the acquisitions of the Yapstone, that's how that calculation works that you had the acquisitions for the full period presented.

So the Yapstone, we owned for one month so what that pro forma does is adds two more months of ownership into the results. And so going forward that in Q2, Q3, in Q4 you won't have that because we'll have them in the fold for the full quarter.

That year end for the last 12, which is on an LTM basis, we'll have that calculation to earn out adjusted EBITDA, we'll add in that same two months because we will only have owned it for 10 months this year versus 12 months.

Does that make sense?

Yes. I'm assuming going forward now, every quarter -- I mean if we keep everything static from an M&A standpoint -- that the adjusted EBITDA and the pro forma EBITDA will start to converge more and more?

Yes.

Okay. And just last question, as it relates to 2Q, should we expect the full impact from the Yapstone acquisition or will that take some time to ramp before you're getting full revenue and EBITDA contributions?

No, it'll be in there. There's a little funkiness in the purchase accounting allocation because it'll take us, say, three to four months to get that Yapstone business full integrated on to our systems. So part of acquisition we negotiated transition services at no cost, kind of part of the purchase price.

Well the accountants, which I guess I'm one, makes you put value on those free services. So we will have a higher cost, let's say about $1 million over the first $1 million and change from an accounting perspective over those first six months of ownership. But that's a nonrecurring type item and that is just a purchase price allocation. But absent that we will have the full benefit, certainly on an EBITDA perspective each quarter from that acquisition.

Okay, great. Thanks, guys.

Thank you. (Operator Instructions).

And it is at this time I'm not showing any further questions on the phone line so I would now like to turn the call back to Mr. Tom Priore for any further remarks.

Thank you very much. I would like to thank everyone for their participation on the call. And obviously Mike and I remain available should any further questions arise that you'd like to take offline. And you have a very focused team on driving the results for the remainder of the year. We'll look forward to our coming updates in the quarters ahead.

Thank you, everyone.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect and everyone have a great day.