Good day and thank you for standing by and welcome to the Priority Technology Holdings Second Quarter 2021 Earnings Call. And I would now like to hand the conference over to Dave Faupel. Please go ahead.

Good morning and thank you for joining us. With me on the call today 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 involve a number of risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. The company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. We provide a detailed discussion of the various risk factors in our SEC filings and we encourage you to review these filings. Additionally, we may refer to non-GAAP measures, including but not limited to, EBITDA and adjusted EBITDA during the call. Reconciliations of our non-GAAP performance and liquidity measures to the appropriate GAAP measures can be found in our press release and SEC filings available in the Investors section of our website. With that, I would like to now turn the call over to our Chairman and CEO, Tom Priore.

Thank you, Dave and thanks to everyone for joining us for our second quarter earnings call. I would like to begin this morning’s call by providing a brief overview of our strong growth in the second quarter and how we are positioning Priority for success for the remainder of 2021 and over the long-term. Following Mike’s financial review of our quarterly results and the continued improvement in our balance sheet, we will offer some perspective on our positioning for the future of digital commerce. There are few quick highlights I’d like to share upfront. As we outlined in our earnings release, the growth trajectory we established for the pandemic last year and the first quarter of 2021 has continued to accelerate in the second quarter. In the first half of 2021, we exceeded our forecast across key financial metrics, including revenue, gross profit and adjusted EBITDA. Comparing our second quarter 2021 results with the second quarter of 2020 when adjusted for the exclusion of the RentPayment’s business that we monetized in September 2020 and non-recurring costs incurred in both comparative quarters, revenue of $125 million increased 42.1%, gross profit increased 35% to $35.2 million, and adjusted EBITDA increased 54.9% to $21 million. Importantly, each of these key metrics accelerated from Q1 2021 levels of $113.3 million, $31.4 million and $18 million, respectively. Our outstanding results were driven by a 54% increase in total bankcard volume to $13.9 billion for the quarter and approximately 8.5% year-over-year merchant growth in the consumer segment. Granted, these growth rates are compared to second quarter of 2021 to the COVID-impacted second quarter of 2020. However, volumes also accelerated from Q1 2021. Compared with the first quarter of 2021, we experienced a 17% increase in total bankcard volume from $11.9 billion to the previously referenced $13.9…

Thank you, Tom and good morning. This morning’s press release provides highlights of our second quarter 2021 results compared with the second quarter of 2020 on a GAAP and non-GAAP basis. GAAP Comparisons include second quarter 2020 results for the RentPayment business sold to MRI in September of last year and also includes certain nonrecurring expenses in both quarters as described in the press release. In order to provide clear comparability of ongoing business performance, my comments will focus on the non-GAAP amounts that exclude RentPayment from the 2020 second quarter and exclude the nonrecurring expenses from both quarters. This non-GAAP comparison is not a substitute for the prominent comparisons under GAAP. Rather, my comments are meant to be a complement to understanding the GAAP-based comparisons. Management’s discussion and analysis and our Form 10-Q will provide you with a discussion of the second quarter and first half comparative results on a GAAP basis. As such, in the second quarter of 2021, consolidated revenue of $125 million increased by $37 million a 42.1% increase from $88 million in the 2020 quarter. Revenue growth of $37.9 million in Consumer Payments and $0.7 million in Integrated Partners was slightly offset by a revenue decline of $1.6 million in Commercial Payments. Gross profit of $35.2 million increased $9.1 million, a 35% increase from $26.1 million in the 2020 quarter. Gross profit margin of 28.1% decreased 150 basis points from 29.6% in the 2020 quarter due to mix. Income from operations of $9.2 million increased $5.7 million, a 161.3% increase from $3.5 million in the 2020 quarter. Adjusted EBITDA of $21 million increased $7.4 million, a 54.9% increase from $13.6 million in the 2020 quarter. Now let’s break this down within the segments. Consumer Payments revenue was $119.6 million. This is a 46.4% increase over…

Thanks Mike. As Mike shared, on the heels of an excellent finish to 2020 and outstanding Q1 performance, we followed up with an even stronger second quarter. I noted in our Q1 update my belief that 2020 would 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. I would submit that our continued momentum through the first half of 2021 demonstrates that we’re delivering differentiated products to our existing verticals, that we possess the skills to navigate through obstacles swiftly as we did through the impact of the pandemic and the network rule changes in subscription e-commerce and that we cultivate acumen to identify and invest intelligently in high-growth opportunities early in their cycle, well ahead of our industry competitors as we have in B2B payments and our diverse integrated partner channels of real estate, mobile hospitality, health care and now consumer finance. As we execute on our stated strategy with precision, we continue to demonstrate that Priority is built with intention and is poised to be among the leaders powering the future of digital commerce. With each month that goes by, the numbers demonstrate that our customers, reselling and ISV partners and commercial marketplaces are seeing us as the go-to platform for businesses to collect, store and send money in an easy and low friction manner. It’s our belief that the future of digital commerce will be won by operators with complete control of the payment rails for payment authorization, settlement, account ledgering and disbursement. We’re among the very few equipped with direct payment connections to all major network partners, Federal Reserve, full back-end settlement capabilities, full-service card issuing and payable solutions and virtual banking and payment facilitation capability…

Thank you. And our first question comes from Andrew Scutt from ROTH Capital Partners. Your line is now open.

Good morning. Thank you for taking my questions and congrats on the strong quarter. First question, as you guys noted in your prepared remarks, you saw really strong volume growth on both an annual and sequential basis. Can you guys just talk a little bit more about the dynamics driving the growth and, in particular, in base consumer and CPX?

Sure, Andrew. We’ve seen particularly kind of towards the tail end of the first quarter the hospitality segment dramatically improved coming out of the pandemic. That’s probably the biggest area of improved growth in the year-over-year period and in the quarter. It’s also, as you’re well aware it’s a lower margin, which was the reason for some of the decline in the margin, which Mike alluded to. The other segments have been relatively steady. We’re a large provider of services to many professional service segments like legal services as well as a host of other service industries. That remained relatively steady. So, on the consumer side it was really driven by the improvement in the hospitality segment. The – on the CPX side, that growth has really just been consistent across the portfolio. There is no one area, I would say, that dominated the continued volume growth. We’ve continued to see penetration of payments in existing programs with more suppliers accepting card based payments. And the sales pipeline for new buyers that are coming on to the platform has just continued to be steady. Again, no one particular segment jumps out. It’s been in healthcare, light manufacturing, areas of construction. Those that – it’s kind of really generally been broad-based, which is encouraging because we think that’s a sign that more and more businesses, not just in the U.S., but frankly globally, are starting to realize the benefits of automated payables.

Great. Thank you. That was very helpful.

Mike, anything you might add?

No, Tom. I think you covered it pretty well.

Thank you. And our next question comes from Brian Kinstlinger from Alliance Global. Your line is now open.

Thanks. Great results. The global shipping challenges are impacting so many companies: higher costs; in some cases, inventory shortages. I’m not – maybe you can share what percentage of revenue comes from CPG or retail? And are you seeing any impact now in the third quarter or after in terms of slower sales by those companies in their verticals as a result? And if so, maybe which industries and how much does it account for?

Well, retail trade is about 25%. That broad group of businesses that fall in retail trade ZIP codes is about 25% of our mix. And we haven’t noted any – within our customer base, we haven’t noticed any issues from the shipping channels that you described.

So essentially, you’re not seeing volumes impacted right now on your payment side for that?

No, not within our customers.

That’s great. And then it sounds like the e-commerce pie right now is shrinking in the short term as consumers return to stores. And of course, they are just happy to get out of their houses. Can you talk about the puts and takes of this for your business where you expect investors will see the benefits of getting back to stores? And then is there any pressure on the e-commerce side in terms of revenue or margin at all?

Mike, do you want to take that one?

Yes. Sure.

Then I’ll follow-up with...

So I said there is a couple of ways to orient around our e-commerce segment. We’ve seen – we really haven’t seen that meaningful of a drop in total mix in what I’ll call card present to card not present. At the peak of COVID, that was kind of around 55% card present, 45% card not present. Maybe that shifted 5%. We actually – one of the reasons why we feel very optimistic about our ability for outperformance in the coming quarters is we did have some decrease and this was actually engineered. We did decrease some of our boarding trends in subscription e-commerce through the quarter. There were a few audits that went on within that segment, within – that were driven by the networks. So we found some segments that we thought should be operated a little cleaner. We called those, so it decreased some of our subscription e-commerce volume during the quarter. But we expect that to pick right back up here in the third quarter and into the fourth quarter. So it’s actually one of the bright spots for optimism in the coming quarters.

You briefly discussed, obviously, trends in B2B payments. But I guess I’m expecting when you expect volume to really take off almost like hockey stick growth because it seems like that’s a hot space. And what does management need to accomplish before adoption improves substantially? And then I have one more question.

Sure. Look, that’s just going to be conversion of the pipeline. We have – these are long sales cycle processes. And we are very confident in the pipeline we have with both FIs and ISV partners looking to leverage our complete tool set to monetize their B2B payments network. And we just need to finish the job. But those – these are massive networks that are in the tens of billions of available volume that each – we just need to convert. It’s as simple as that.

My last question is, of course, you talked about Finxera acquisition hasn’t closed and you’re expecting it well this quarter. But have you been able to go to market on the cross-selling and revenue synergies? And if you have, what has been the early responses you’re getting from prospective or existing customers?

Yes. I really appreciate the question. The answer is yes. We were ready to roll with the combined offering to, I’ll call it, collect, store and send money immediately upon the announcement. As we noted during the announcement of the Finxera combination, we’ve already been working with the team for months, really almost a year. And they were already an integrated payments provider – or I should say an integrated payments customer, excuse me. So we accelerated that, that feature combination. We’ve already begun rolling that out with ISV partners. There is been very strong adoption of the combination. And we will be – you’ll start to see customers here in the third quarter that are using the full suite of Priority’s collect, store and send money capability with the combination of the Finxera ledgering and banking-as-a-service technology.

Great. Thank you so much guys.

Thank you. And our next question comes from George Mihalos from Cowen. Your line is now open.

Hi, guys. Congrats on the solid results here in 2Q. Just wanted to ask the strong volume growth, the 54% that you saw sort of year-over-year. I’m just curious, realizing the comparisons would be easier the earlier part of the quarter, maybe you can give us some sense as to what kind of the exit rate was from a volume perspective, say, from June going into July. Just wondering how that’s been acting.

You mean in 2021?

So that – yes, in 2021, so it’s just kind of the exit rate coming out of 2Q going into July?

It’s been steady as she goes. Look, we’re kind of – we’re consistently, in terms of bankcard, exceeding $5 billion on a monthly basis. And that trend hasn’t diminished. And part of it – look, George – and I think this is really significant and needs to be recognized on our platform. Our products sell. We have net merchant growth. Merchants adopt our solutions because they provide more versatility in the way they interact with their customers, in the way they manage their business. So we consistently board more than 4,000; on a very good month, 5,000 new merchants a month. We certainly don’t lose them at anywhere near that rate. And when you’re having net merchant growth because of the value of your products, it’s going to lead to volume growth. Now that is...

And June was a strong...

Great momentum. I’m sorry. Go ahead.

I am sorry, June was a strong month for us, and July is looking – it looks a lot like June. And I suspect August will be there as well. Pretty steady, as Tom said.

Okay, that’s great. And just two other ones, one other high-level question which would be maybe tying on to the prior question, Tom, but obviously, a lot of conversations around inflation and the like and the cost of goods rising. And I’m curious how you think about that from your perspective. And obviously, there are certain types of spending that you guys would prefer. But you’re also a spread business. So as those prices go up, I would think that’s a benefit for you guys. And then just the second question on Finxera, Is the outlook still for ‘21 that, that business will be sort of in the $80 million range? I know you’ve done about, call it, $35 million or so or a little bit less than that over the first half of the year. Just curious if the $80 million is still the target.

On a revenue basis, we actually think it’s probably more in the mid-70s.

Okay. And then just curious, your thoughts on a more inflationary environment?

Yes. Look, I think what’s interesting, you’ll note – and again, I just think this kind of continues to reinforce the strength of our product offering, we actually saw for the quarter a decline in average ticket. So certainly, an inflationary environment is going to help volume. But we also make – we make money on clicks as well. And in many instances, we care more about the number of transactions as opposed to the size of the transaction. So it’s a balance, and that’s true of all processors. But we’re – we feel very good about where we’re positioned regardless of the – I’ll call it the inflationary environment and the economic cycle. We feel like we have some countercyclical assets that will do well if we do see a downturn that will more than offset some of the strong fundamentals of a growing economy and the impact of inflation on volumes.

Okay, great. Appreciate that.

Thank you.

One other thing I would – I’m sorry. I don’t mean to interrupt you. I do want to come back to you because you asked a question about Finxera. And the stimulus is – that’s impactful to the number of consumers that tend to opt into a debt settlement program. But through the summer, we are now seeing growth in the number of enrollments and net growth in the total portfolio. So that gives us a great deal of comfort moving into the second half of the year. So to put a fine point on that, consumers that were into a debt settlement program, let’s say, 3 years ago and are now improving their debt and maturing out of it, new enrollments are exceeding those that are maturing out of debt settlement. And the team at the CFTPay has had a number of impressive wins on the sales side that will be further bolstering the boarding trends in the second half.

Thank you. And our next question comes – actually, I am sorry. And our next question comes from Tyler Roberts from TBK Bank. Your line is now open.

Hi, good morning, Tom. Thanks for taking my question. Congratulations to you and the team on an excellent quarter. You sort of answered this in your previous statement, but regarding the Finxera acquisition, are you seeing any near-term trends from the continuation of moratoriums as well as the enhanced unemployment rolling off in select states.

Hey, Tyler. Good to talk to you, by the way. As I noted, we’re seeing improved trends coming out of the quarter. So we’ve – I would say that, coupled with, we think kind of a very conservative subscription e-commerce quarter in Q2 that has excellent fundamentals for improvement. We feel if our pipeline converts across CFTPay or subscription e-commerce segment and our Commercial Payments, we could see improvement in our – the guidance – the improved guidance that we provided this quarter. So that’s a – we’re very optimistic about the conversion of that pipeline and the speed at which it can convert.

Perfect. Well, thank you again and congratulations again on a strong quarter.

Thank you. We’re going to stay focused on continuing to deliver at that rate.

And thank you for your question. And I am showing no further questions. I would now like to turn the call back over to Tom Priore for closing remarks.

Thank you very much, operator. Just want to thank everyone once again for taking the time to evaluate us as an organization and our positioning in this industry. And we will continue to reinforce what we think is a very unique platform to collect, store and send money. And the vision that we had for that platform is coming together, certainly at the rate in which we expected, and we look forward to sharing our Q3 results as that mission continues to become more clear to the constituents in our market. So thanks, everyone, for your time. Hope everyone stays safe amidst this more recent surge in COVID and stay healthy and best of luck to all. Thank you.