Priority Technology Holdings Inc (PRTH) 2020 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Priority Technology Holdings Fourth Quarter and 2020 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference to your speaker today. Dave Faupel, please go ahead, sir.

Thank you, Victor. Good morning, and thank you, everyone, for joining us. I'm Dave Faupel, I'm the Chief Marketing Officer here at Priority Technology Holdings. And with me on the call today are Tom Priore, our Chairman and Chief Executive Officer; and Mike Vollkommer, our Chief Financial Officer.

Now 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.

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'd like to turn the call over to our Chairman and CEO, Tom Priore.

Thank you, Dave. And thanks to everyone for joining us for our fourth quarter earnings call. I'd like to begin this morning's call by providing a brief overview of our impressive Q4 and year-end results. Along with the discussion of the acquisition of Finxera during the current quarter. Then I'll turn it over to Mike, who will go into more detail on our segment level performance, financial highlights and the improvement on our balance sheet.

As you saw in our earnings release, the momentum that we built in Q3 continued through Q4. Our performance is the result of executing our plan through a challenging year due to the COVID-19 pandemic. We continue to invest in our people and culture, our products and our technology infrastructure.

The strength of our payment operations, product offerings and having diversified countercyclical payment assets, allowed us to quickly adapt to the changing COVID environment to deliver strong top line revenue growth and bottom line results. This was a statement year in the history of our organization. As consumers and businesses continued to struggle with restrictions related to the pandemic, our teams were focused on solving our customers' problems and helping them perform in this environment.

Our results today show the success of that mission. Revenue of $106 million, increased 8.1% from $98.2 million for the quarter and increased 8.7% for the full year despite the impact of the COVID lockdown period.

Income from operations of $6.2 million increased 489.3% from $1.1 million for the quarter and rose to $20.9 million for the year, an increase of 190.4%. Meanwhile, adjusted EBITDA of $18.2 million for the quarter represented an increase of 12.7% from $16.2 million from the prior year period. For the full year, adjusted EBITDA increased 19.4% to $70.3 million. Despite the loss of RentPayment's contribution during the fourth quarter of 2021.

Recently, we announced an agreement to acquire Finxera Holdings, a pioneer in the fintech industry and a company that launched and operated one of the first Banking-as-a-Service platforms. Combination positions us as a leading innovator in payment and financial technology solutions with the ability to deliver payment facilitation and banking-like services at scale to our software partners, SMB and enterprise merchants and our integrated partner businesses vertical software applications.

CFTPay, Finxera's flagship application that provides account administration solutions to the burgeoning and countercyclical debt settlement industry will operate as a wholly owned subsidiary of Priority within the consumer finance division of our Integrated Partners business segment.

We feel that this acquisition completes our payment infrastructure platform to fully monetize payment networks. Given our combined ability to handle all forms of money or value in motion, and at rest in virtual bank accounts and digital wallets. In short, we're a one-stop shop for modern software companies looking to monetize payments in acquiring and issuing without the headaches of managing payment operation functions like client service, risk management, underwriting and compliance. We expect this transaction to close once the transfer of Finxera's nationwide money transmission licenses are complete in the next 6 to 9 months.

I'd now like to hand it over to Mike Vollkommer to provide further insights into the quarter, current trends in each of our business segments and the improvement in our balance sheet and liquidity. Mike?

Thank you, Tom, and good morning to everybody. Yesterday's press release provides results for the comparative quarters and the years ended December 31, 2020 and 2019 on a GAAP basis. It also provides very relevant highlights of the results on a more comparable basis that exclude the RentPayment assets sold on September 22, 2020.

So my fourth quarter comments will focus on amounts excluding RentPayment in the 2019 fourth quarter in order to provide the most meaningful review of our fourth quarter results and trends. The last 2 pages of yesterday's press release provide reconciliation and full year 2019 and 2020 GAAP results with the results excluding RentPayment. And I'd also like to point out that the attachments to our March 10 press release provided the same reconciliation for each quarter within 2019 and 2020.

Consolidated revenue in the fourth quarter of 2020 was $106.2 million, a 12.3% increase from the $94.5 million in the 2019 quarter. Throughout 2020, our diverse distribution channels continued strong new merchant boarding, nearly 13,000 merchants were added in the fourth quarter. This led to a December that was the highest revenue month of 2020, and this strength has carried into the first quarter of 2021.

Gross profit was $32.5 million, a 15.5% growth from $28.2 million in the 2019 quarter. Gross profit margin of 30.6% increased 84 basis points from 29.8% in the 2019 quarter. Income from operations of $6.2 million was a 354% improvement over $1.4 million in the 2019 quarter.

Selling, general and administrative expenses included nonrecurring expenses of $1.3 million compared with $2.6 million in the fourth quarter of 2019. And those items are detailed within our press release to reference.

Adjusted EBITDA of $18.3 million increased 35.2% from $13.6 million in the 2019 quarter. Now similar to revenue, December was the highest adjusted EBITDA month of 2020, and this strength has also carried into the first quarter of 2021.

Now let's break this down within the segments. Consumer Payments revenue was $100.8 million. This is a 15.3% increase over $87.4 million in the 2019 quarter. Growth was driven by a 6x increase in high-margin specialized merchant acquiring revenue, which contributed $9.8 million of growth. And this was supplemented by an overall 3% increase in merchant bankcard volume. Merchant bankcard volume processed was $11.1 billion compared with $10.8 billion in the 2019 quarter. Merchant bankcard transactions of $120.3 million declined 6.8% from $129.2 million in the 2019 quarter. However, average ticket of $91.99 grew 10.5% from $83.24 in the prior year quarter.

These year-over-year dynamics are similar to those that we saw in the third quarter of this year. Pandemic-related economic factors have impacted the merchant volume mix, including shifts in payment transaction activity among certain vertical industries, spending trends have resulted in consumers conducting fewer payment transactions but at higher average values and card-not-present transactions have increased. Card-not-present transactions generally offer more favorable pricing to Priority than swipe transactions.

Consumer Payments income from operations was $12.9 million. This is a 29.5% improvement of $3 million over $9.9 million in the 2019 quarter. Key drivers are a 5.3% increase in gross profit, which was partially offset by increases of $1.8 million in SG&A and $0.7 million in depreciation and amortization. The increase in SG&A largely resulted from nonrecurring activity in each year's fourth quarter. The 2020 quarter included $1.2 million of nonrecurring asset write-downs partially offset by a benefit of $0.4 million in the reduction of contingent consideration. The 2019 quarter included a $0.6 million benefit from reduction in contingent consideration. These nonrecurring items are detailed on Page 5 of yesterday's press release for your reference.

Commercial Payments revenue was $3.9 million, is a $2.6 million decrease from $6.5 million in the 2019 quarter due largely to curtailment of certain programs within managed services. Revenue from processing in our CPX accounts payable automated solutions business continued its steady performance with revenue of $1.5 million, which approximated the 2019 fourth quarter.

Commercial Payments loss from operations was $0.5 million compared with income from operations of $0.2 million in the 2019 quarter. Gross profit was down $1.3 million, which was partially offset by a reduction of $0.6 million in other operating expenses.

Integrated Partners revenue was $1.5 million. This is a $0.8 million increase from $0.7 million in the 2019 quarter. Now Integrated Partners includes Priority Real Estate Technology, Priority PayRight Health Solutions and Priority Hospitality Technology. PRET continues to serve the real estate market through our ongoing payment processing arrangement with MRI as well as our Landlord Station business.

PRET was the largest contributor to this segment's growth over the 2019 quarter. Now Hospitality's e-Tab products revenue and profits are reflected within the Integrated Partners segment for sales made by the Hospitality team and within consumer for sales made by that channel. This reporting under reflects the tremendous growth we have been incurring within e-Tab since its introduction. Across both channels, fourth quarter volume grew 327%, with transactions up 251%. Total revenue approached $400,000 in the fourth quarter of 2020 across all channels. This growth is carried into 2021 as e-Tab continues to gain wider acceptance among our hospitality merchants. And we are also seeing similar acceptance momentum within our PayRight products.

Corporate expense was $6.1 million compared with $8.5 million in the 2019 quarter. Included in the 2020 fourth quarter were nonrecurring expenses of $0.4 million and that compares with nonrecurring expenses of $3.2 million in the 2019 quarter. And again, these nonrecurring items are detailed on Page 5 of yesterday's press release.

Now let's move on and review our significantly improved liquidity position. As you recall, at the end of the first quarter of 2020, net debt was $496.5 million and total net leverage ratio was 7.67x. Our cash position stood at $2.9 million at that time, and we had $10 million of borrowing capacity on our $25 million revolver.

At that time, we said that we were laser-focused on improving liquidity in 2020. Well, we ended the year with net debt of $372.8 million, a $123.7 million reduction in 9 months and a total net leverage ratio was reduced to 5.85x. Our cash position was $9.2 million at December 31 and we have $25 million of borrowing capacity on the revolver, having repaid the remaining $11 million outstanding during the fourth quarter.

We continue to be laser-focused on improving liquidity in 2021. We are in the midst of refinancing our debt, which will not only reduce interest rates but will reduce mandatory debt amortization by well over $40 million in the next 2 years. Our liquidity will be further enhanced with a new $40 million revolving credit facility and ready access to preferred equity for accretive acquisitions.

Now before turning the call back to Tom, I'd like to review the guidance that we provided in our March 10 press release. This guidance does not include any increases related to the acquisition of Finxera, which is expected to close in 6 to 9 months.

Revenue is expected to range between $450 million to $470 million, a growth of 15% to 20% above 2020 revenue of $392 million, excluding RentPayment. Adjusted EBITDA is expected to range between $76 million to $80 million, a growth of 22% to 29% above 2020 adjusted EBITDA of $62.1 million, excluding RentPayment. The strength we're experiencing so far in the 2021 first quarter bodes very well for achieving these earnings objectives.

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

Thanks, Mike. As Mike shared, we had very strong growth in Q4 and during fiscal year 2020. The momentum we built in December is continuing for us into the first quarter of 2021 as measured by top line revenue and bottom line adjusted EBITDA growth.

As you can see from our strong results through COVID and as the economy reopened, we have a resilient business that performs through varying business cycles. It's built to last and it's built with intention. Our core merchant acquiring business is the fifth largest by volume among nonbank acquirers, while our CPX automated payables product is market-leading among its peers. And within our Integrated Partners segment, we can expand and monetize vertical strategies, like we have with RentPayment and Finxera with relative ease.

That reality is becoming clear to a broadening base of customers, investors and market analysts as we continue to perform and accelerate our operating and technology platform developed for the future of payments. As a company, we are energized by the collective quest to make payments easy. And our organization is moving with purpose towards that mission.

Operator, we'd now like to open the line for questions.

(Operator Instructions) Our first question will come from the line of Brian Kinstlinger from Alliance Global.

Can you talk about any seasonality in your Commercial Payments business? It sounded like December was the strongest volume ever, and you said that carried into the first quarter. So that suggests to me, we shouldn't see any material seasonality. Is that right?

Yes. We don't really experience seasonality in that business. What's delayed some of the growth trajectory that we had in our pipeline has really just been COVID related and the way banks responded to COVID. So that -- just a reality of that shutdown and kind of a -- taking a moment to kind of reassess among our bank treasury partners in terms of how they were going to really push forth on automated payables, which, I think, generally in the market has largely been travel and T&E and fleet. So the good news is they're recognizing that true automated payables is a much more important element of their commercial card platforms. And we're just now seeing the benefit of that momentum picking up.

Yes. So we're asking broader on the seasonality. But to my point, another question I had was on CPX revenue is flat line throughout 2020. Is that what you're referring to as banks? I guess, let me take a step back, on CPX, are customers reluctant, are enterprises reluctant right now to take this in this environment? What has led to the flat line of that business? And then what are you doing that you think will drive much stronger demand for that business in 2021?

Yes, sure. So actually, volume is up considerably. So it really is just a change in margin mix. And yes, we have a different margin profile on bank volume versus direct. So we've actually seen adoption of card, both in what I'll call kind of pure Commercial Payments as well as the B2B acquiring segment pick up. And we expect that trend to continue.

The driver of the acceleration in the commercial side is really just going to be the adoption among our pipeline that's in position to close and driving that adoption through to treasury clients within those -- that bank segment.

And to get back to -- on the commercial side, 4,500 to 5,000 merchants a quarter, which you highlighted in your slide deck. Is there any more investments that you're making or need to make? Or is that all a function of open in your...

Those merchants.

Just to be clear, those are on the acquiring side?

Yes.

And we've kind of steadily been at that rate. December is normally a little bit below just because it's a holiday season. So we'll see boarding drop off. But the trend in that level of boarding through -- even through COVID and as the economy recovered, has been very consistent, and it remains so in the early part of 2021.

Okay.

Yes, absolutely. Hey, if I could just make one other comment as I think it's relevant to kind of where you're going on the commercial side is the -- we do not need to make any additional investment in that business as it scales. So it's -- as I mentioned in my -- kind of my notes, this has been built with intention, it's been built with purpose. We're poised for that momentum we already see in the pipeline, and we don't need to make additional investments to convert it.

Our next question will come from the line of George Mihalos from Cowen.

And Happy St. Pat's to you both. I wanted to start off. Just can you remind us, in the fourth quarter, within the consumer business, how much of that is card-not-present today? And then as you think about the outlook for 2021, what kind of growth rates are you incorporating in the guidance again for that e-comm business?

Mike?

Sure. The e-comm business is -- from a card-not-present transaction perspective, we see the consumer behavior probably holding. I think as volume grows with the reopening, say of the Northeast and the restaurants, people going to restaurant, yes, there will be volume coming on that's card present. But a lot of what's built into the fabric of people's behaviors from a not-present activity, we don't see that receding.

When you asked a question about what growth from the e-comm? If you're talking about the specialized merchant acquiring program, which we've had really exceptional growth throughout 2020, we see continued growth in that business. We're forecasting a more conservative growth than obviously we had in 2020. But it grew largely in the second half of 2020. So we're really riding a good crest of year-over-year comparison in the first half of the year. So we -- it continues to grow nicely. And -- but we don't have it forecasted to grow at the same rate, obviously, as it did in 2020.

Understood. And that's obviously just for comparison issues, just given the strength that you saw in 2020, right? It sounds like you're still entirely encouraged by what you're seeing?

Absolutely. Yes.

Okay. Great. And just last question for me, maybe to ask the prior question a little differently. The $450 million to $470 million of revenue that you're contemplating for '21. Any thoughts around kind of the cadence of how that revenue growth might progress throughout the course of the year? Just want to make sure we're thinking about that appropriately.

Yes. Well, we've been growing when you have a -- the comparative quarters have been a little difficult this year, right? Because I think you're going to see really exceptional growth in Q2. Last year was flat year-over-year, even though we grew EBITDA. So Q2 this year is going to be over 30%, we think. But the other quarters are in the teens, the mid-teens, kind of, consistent with what we've been seeing this year.

And George, perhaps if you're referencing sort of the contribution over of that -- of kind of the revenue range over time, we don't see a lot of seasonality in the book. So it's relatively consistent throughout the year. But as Mike noted, given some of the COVID period that's going to be the biggest gap in terms of year-over-year growth.

(Operator Instructions) Our next question will come from the line of Andrew Scutt from ROTH Capital.

Congrats on the quarter. First question is just on guidance. I believe you said revenue and EBITDA does not account for the impact of the Finxera acquisition. I was just wondering, does that include in EBITDA, any integration or kind of ramp-up costs in there? Or does that not include anything even on the cost side of the business?

We've not included in that projection any synergies. So we think there's -- and we know that there is a meaningful amount there. The platforms are very complementary. So even the cost of, let's say, achieving some of the synergies, which are really amount to contract consolidation expenses, things like that, which we've already examined are less than $250,000.

Great. And then my second question here, a little bit different. Have you guys seen a shift in kind of the industries where your merchants are seeing demand now that the economy has opened? And are there any kind of segments that are still being pressured?

And then secondly, is there any chance you guys could see here with the second -- 2 rounds of stimulus strikes coming out, any bump in consumer spending that you guys could get some incremental boost from?

So as it relates to your first question, areas where we had seen lift throughout the year, wholesale trades, as you might expect, like trades businesses, plumbing, electrical, landscaping, those types of things. That is more and more moving to digital transactions. So that's -- that transition has kind of been in motion. We see that continuing. That will certainly be an area of lift.

From a volume perspective, look, the overall hospitality space and as you might imagine, kind of salon and so forth is down relative to its historical norm, but from the heights of COVID, tremendous rebound. Nevertheless, it's still flattish to down versus prior years, but that decline is more in the single digits. So until we kind of fully reach herd immunity and we get more of the safety concerns are fully alleviated, we would probably -- we've modeled an expectation that we'll sort of stay in this kind of steady state until we see a bump as people just get back out in greater numbers.

The good news is those segments, because they're so -- they're card present, they are very thin margin areas in the merchant acquiring space. So they have less of an impact at the recurring net revenue and gross profit level for us. So hopefully, that answers your question.

And Andrew, I apologize, you had a follow-up, and I can't quite remember the granularity on it. Would you mind repeating?

Yes. Yes, no problem. And that answer was very, very helpful. So I appreciate it. The second one was just with the 2 rounds of stimulus checks have come out and potential boost to consumer spending. Do you guys see any kind of incremental upside there or any possibility of that?

I would -- and I'll ask Mike to comment on. I'll just say within our thinking, we haven't modeled in any expectation that, that's going to have a meaningful impact on spending trends that we would see. I think more importantly, particularly with the addition of -- now with the addition of the Finxera business is we've modeled what historically there has been growth of north of 20%, upwards of 30%. The stimulus checks have actually, I think, we think, held down the capacity of that business. And once the punch pole is taken away, it's more than likely we're going to see more consumer activity within the debt settlement arena that would meaningfully benefit the Finxera business line as the administrator to those consumer accounts to help them arrange for debt relief.

So we feel like the combination of our platform is going to -- again, it's just going to perform well through all business cycles. And we're already seeing the benefit of the transition from segments that were historically non-card going to digital payments. So we'll benefit there. And as we do see some of the stimulus get extracted, we expect the countercyclical segments that Finxera operates will do quite well while we begin to inject their technology into our existing business lines for integrated payments.

Mike, anything you would add?

No, I think that's right. We certainly don't expect to see the stimulus driving volumes in a noticeable way.

Maybe if it does, it would just be upside to our current case.

Exactly.

And I'm not showing any further questions in the queue. I'd like to turn the call back over to Tom Priore for any closing remarks.

All right. Thank you very much, operator. I would just like to thank everyone very much for their interest in our business and for participating in the call today. I hope everyone has a fantastic St. Patrick's Day, despite the unusual way in which we're celebrating it. But everyone, have a great day. Thank you very much.

Ladies and gentlemen, this concludes the conference call. Thank you for participating. You may now disconnect.