Good morning, and welcome to Priority Technology Holdings Third Quarter 2022 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded. I'd like to turn the call over to Mr. Chris Kettmann. Please go ahead.

Good morning and thank you for joining us. With me today are Tom Priore, Chairman and Chief Executive Officer of Priority Technology Holdings; and Tim O'Leary, Chief Financial Officer. Before we give 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 turn the call over to our Chairman and CEO, Tom Priore.

Thank you, Chris, and thanks everyone for joining us for our Third Quarter 2022 Earnings Call. I would also like to personally welcome Tim O'Leary, who was named CFO in September. We are excited to have him on the team. We once again delivered excellent quarterly results, reporting strong revenue and EBITDA growth during the period. Our third quarter revenue increased almost 26% from the prior year to a record $166.4 million, which led to a nearly 50% increase in gross profit to $58.5 million and a 48.7% improvement in adjusted EBITDA to $35.1 million. These results were fueled by a 510 basis point expansion in gross margin to 35.1%. Operating income of $14.1 million increased nearly 70% from the third quarter of 2021. As you can see on slide four, our strong Q3 results extended the positive momentum we've been seeing throughout the year. On a year-to-date basis, total revenue was up 31.1% to just over $486 million and grew organically by 12.7% in the third quarter and 17% on a year-to-date basis, excluding the impact of the Finxera acquisition. Gross profit increased by 56% to $165.9 million and adjusted EBITDA was up over 60% to $100.5 million through the first three quarters of 2022. Year-to-date, gross margin of 34.1% increased 540 basis points from 28.7% we reported in the first nine months of 2021. Tim will go into the segment level detail on our third quarter results shortly. Before he does, let's look at slide five and some of the company's aggregate performance statistics. Our unified commerce platform efficiently serves the SMB, B2B and enterprise payment segments at scale, supporting over 254,000 active SMB merchant accounts, more than 420,000 active bank deposit accounts, and is processing total annual payment volume of over $110 billion, with more than 80%…

Thank you, Tom, and good morning everyone. Before I get into my prepared remarks, I want to take a moment to thank everyone at the company who has welcomed me into the Priority family. I look forward to accomplishing great things with this outstanding team in the years ahead. I also want to thank Mike Vollkommer for being an invaluable resource to me over the past several weeks as I transitioned into this role. I'm sure he's listening. So Mike thank you for all that you’ve done to have a positive impact on the company and I hope you enjoy your well-earned retirement. Now moving on to the task in hand. As I review the segment level contribution to the consolidated third quarter results, please refer to the supplemental slides or the MD&A for further details. Our MD&A is included in the Form 10-Q that was filed with the SEC this morning and provides a discussion of our comparative third quarter and year-to-date results. A link to that filing can also be found on our website. As Tom mentioned, we've had strong financial performance across all business segments in the third quarter and for the first nine months of 2022. Looking at slide 10, SMB payments revenue of $139.9 million increased 12.1% over the prior year driven by bank card dollar volume growth of 9.2% to roughly $15.1 billion, 8.3% growth in bankcard transaction count and just under 1% growth in average ticket size. Average merchant count of just over 252,000 in the quarter grew 6.1% from the prior year. This growth was driven by strong merchant boarding trends where new monthly merchant boards averaged over 5,000 per month throughout the quarter. That is modestly higher than the historical monthly average of about 4,500. Looking at slide 11, B2B payments…

Thank you, Tim. Further to Tim's closing remarks, I thought our audience may be interested to hear expectations shared by highly respected consultancies that strongly reinforce our investment thesis to accelerate our embedded payments and banking technology. According to recently released research conducted by McKinsey and Bain, the embedded finance market is large and growing. Bain estimates the 2021 US market for platforms and enablers at $22 billion in total revenue across payments, lending, banking, and cards and they expect this market to more than double to $51 billion by 2026. They also expect the transaction value of embedded finance will surge from $2.6 trillion to $7 trillion in 2026 or over 10% of total US transaction value. The greatest impact may be seen in B2B payments where estimates are for the market to reach $33.3 trillion by 2026. Their expectations are that embedded payments will take a considerably higher share as buyers shift to e-check, virtual cards, and value-added ACH to streamline operations and simplify AP/AR reconciliation. During this time, the B2B embedded payments market will nearly quadruple from $0.7 trillion to $2.6 trillion with revenues growing proportionally from $1.9 billion to $6.7 billion. Very much in line with our vision, McKinsey noted that small businesses starting up today may never interact with a conventional bank. By logging into their e-commerce or what we would say unified commerce platform like MX merchant, they can open a deposit account, order a debit card, and meet most of their financing needs. The operators of these platforms will embed financial products into a single, seamless, convenient, and easy-to-use customer experience. And their assessment is that the winners will likely provide a full suite of services including some regulatory, oversight, compliance, origination, and fulfillment. Enablers like Priority will take the hassle out of…

Thank you. [Operator Instructions] First question will be from Brian Kinstlinger, Alliance Global Partners.

Great. Thanks. I've got a handful of questions. The first question I have is on the expected new Banking-as-a-Service offering. You mentioned the increased investments for that platform to enable you to launch it sooner. I figure in today's economy demand for instant credit is super high. So when is the expected full go live launch with these new investments? And then what kind of risk management is in place to limit defaults?

Great question, Brian. So look some of it's already launched. So you can go to the website and download the pass forward API guide. And we have customers that are in the process of going live as we speak. So -- and they range from real estate construction software. I apologize for the background noise, Brian. I'm in the middle of New York City which has got to always be something going on. So bear with me for a moment. And then as far as some of the other embedded banking, we're ready to go beta and we'll be out with our initial client group in Q4. And the way we're naturally constructed having transactions authorized through our gateway which will be a prerequisite for fast funding or instant funding gives us an authorization that is coming directly from the networks and we know we're going to get the money in the -- basically at 3 a.m. the next day. So that's going to be a requirement for our customers to be on instant funding as they have to authorize through our gateway products, which is basically doing all those fraud checks at the network level and at the authorization level. And once those transactions are authorized, they have to be funded by the networks. And then on the back end, so I mean, this is a pretty cool feature. I'll tell you we can fund that transaction into a merchant within three minutes after authorization. So we're pretty excited about that capability. And then once we do as we fund it, the -- there'll be some controls on the back end as to how quickly that money and what percentage that money can be swept out of their instant settlement account. So we'll continue to refine that through the beta process. And we're also -- right now we're testing out and I prefer not to speak to it directly, but we're testing out a couple of vendors to additionally put in on the front-end authorization from a fraud tool perspective. And we'll pick the best-in-class once we complete our assessment.

Great. That's helpful. And then can you remind us what percentage of your consumer payments revenue comes from retail or CPG. Clearly, you've highlighted the difficulty in the economy? And then maybe which are the top three or four verticals inside the consumer?

Sure. Just -- and I'm sorry I couldn't quite make out -- you said CPG?

Yeah, consumer products -- sorry consumer product or retail. Sorry.

So – yeah, no worries. I just – it was my line that broke up slightly. Look, our largest segments we do a lot in legal services. Hospitality is the next which is largely small restaurant operators for us. We're not doing a heck of a lot of large chains and both of those are in the high-teens percentage. And then our other large segments really kind of fall-in, I'll say, range between 8% to 13% -- from wholesale trade. We do a lot of B2B. We've got some unique tools there salons, your average barber shops. Medical providers would fall into that category. So it's a – each of those categories kind of fall in those high single digits low double digits percentage of volume and revenue depending on the month.

And so then as we think about that mix, with you can call it a recession we call – call it an economic downturn, sorry, can we still expect 8% to 10% growth in consumer payments business with you adding 4,500 to 5,000 merchants a month? So, we think you can sustain the higher growth of recent? How do you think about those puts and takes?

Look, we think for us it's sustainable, and that's certainly what we've seen, but that's largely driven by gaining market share number one. And look the other – so, if you look at our boarding trends in Q3, I'll just say, really consistently in the previous quarters, we were doing call it 4,400 to 4,600 merchants a month. But in each of the months in Q3, we were over 5,000 which should inform you why we accelerated our investment to support new sales channels, to drive market share growth and it's showing up in the numbers of new boards. And as that – as those new – as those – that merchant growth compounds, we'll be the beneficiary of that over time. So that's certainly one aspect. The other area of growth, within that channel is exactly why we're pulling forward this investment in some people call it embedded finance. We really just think of embedded finance as tools for unified commerce, but our unified commerce experience, because now we can increase margin by adding banking, adding instant funding, where we are not sharing that revenue, with our reselling partners, either at all, or at the same percentage. And as you look at the dynamic of rising interest rates right, we've got embedded deposits just sitting in our platform that we now have the capability to monetize. So grabbing incremental settlement funds that are running through our SMB business, and now retaining it and accelerating that cash flow to allow our merchants access to those funds faster to negotiate better deals with their suppliers, or whatever else is going to help accelerate the growth of their business. Basically, gives us a higher deposit balance to earn on in addition to the other fees that we can earn. So, we feel very confident about its implementation and the impact it will have on growth within that segment, regardless of the growth of the merchant base, it will only be further accentuated if you will because of the fact that, I think it's pretty obvious we're grabbing market share.

Great. And the last one on the numbers for you or Tim. two things. First of all, if I heard right managed services is going to be -- looks like closer to zero from the $2.2 million. So – that decline. But then on the fourth quarter guidance, at the low end of revenue we'll see revenues similar to the third quarter. Also, you're talking about investing in the Banking-as-a-Service new offering in the prepared remarks. So at that low end, with the increased investments how do you reconcile generating $5 million more of EBITDA compared to the third quarter?

Great. Thanks, Brian. Happy to jump in on that one. So, I think, if you look at the third quarter, and if you kind of to get to the math you're trying to get to, and you look at the jumping off point you roll that forward into Q4, right? So, if you took the same exact numbers from Q3, roll that into Q4, you'd pick up another 166-plus of revenue and just over $35 million of adjusted EBITDA, which gets you to the low end of the revenue guidance, right? And obviously, there's a range there. And the upper end of that range is 665, which I think we're comfortable with that range. We feel very good about the trends we're seeing on the revenue side. So, if you think about moving towards the higher end of that range from a revenue standpoint, and you look at the incremental EBITDA that needs to be generated to get to the EBITDA range, I think we're looking at obviously a margin expansion needed in the fourth quarter. But we see some tailwinds in the fourth quarter that will aid us in getting to those numbers. I think a number of factors come through. You've got volume-based incentive fees that come from the card networks. And obviously, we continue to post strong volume trends. So we're optimistic on getting those incentive fees. You think about the rising rate environment, which benefits us on the CFTPay business and the deposits that we have there, right? So if you look at the Fed and some of the movements there, every 25 basis points of movement from an interest rate standpoint impacts us to the positive of about $320,000 per quarter from an interest income standpoint. So we've obviously seen some pretty meaningful moves by the Fed at the end of September as well as in early November. And then if you look at some of the curves today, you've got about a 64 -- 80-20 split rather on a 50 versus 75 basis point move in December. So I think we'll continue to benefit on that aspect. And then you've also just got the continued growth in the higher-margin enterprise business, right? So as that business continues to scale, we continue to see very strong enrollment growth in that business. We continue to see an increase in the number of billed clients. So as that continues to scale and outgrow, what it did in the first half of the year, I think you'll see the margin expansion come from all those factors. At the same time I think the investment we've made in the business, from a people and technology standpoint, a lot of that has already been made in the third quarter and year-to-date. So we expect to either maintained or at least slow the growth in those expenses as we continue to push the Banking-as-a-Service product to the market faster.

Okay. Thank you so much.

Maybe putting a fine point on some of the numbers, right? If you look at the sequential growth in enterprise from Q2 to Q3 that -- I'll just say, that sequential growth trend has remained, if not slightly accelerated, so just that level of the quarter. I'm sorry?

What you're saying is the managed services revenue, which is a little bit lower margin, is going away and you're replacing it with a little bit more revenue from higher-margin enterprise revenue.

Yes, much, much higher. So the enterprise revenue, you can see the gross profit percentage is super high, right, 90s percent, and it pretty much all drops to the bottom line. So that along with -- as Tim referenced, we've produced on the acquiring growth throughout the year and feel very confident that we'll be poised to earn incentives that are just lumpy in the way they're rewarded that would come in the fourth quarter. And those two factors give us a high degree of confidence.

Great. Thank you.

[Operator Instructions] The next question will come from Mike Burnt [ph], Singular Research. Please go ahead.

Hi. Congratulations on the quarter. Thanks also for taking my call. The most significant growth number, I found in your 10-Q for this quarter, was CFTPay. And it's also one of the most significant growth numbers I have seen in a while in the 10-Q. So basically, it went from $2.8 million in the third quarter of 2021 to over $18 million in the third quarter of 2022. Could you talk about your competitive advantage with CFTPay? And could you comment on what kind of growth rate you see continuing in the future please? Thank you.

Yes. Let me let Tim handle the -- just the growth attributes and then, I'll comment a little bit on the market positioning.

Great, yes.

Thanks Mike. So if you look at the revenue growth, as Tom and I both mentioned in the prepared remarks, some of that headline growth from a percentage standpoint, is certainly distorted by the fact that the acquisition of Finxera, what we call CFTPay now, that closed on September 17 of last year. So you only had 13 days in the quarter last year from a revenue standpoint. So really nominal levels of revenue last year. So I think the numbers were more reflecting on are the quarter-to-quarter sequential growth that we've talked about where you're seeing 16-plus percent growth from Q2 to Q3 of this year. So very strong growth in the business segment. We expect that to continue for the foreseeable future. But I think the year-over-year comparison is pretty difficult in why you see those wild percentages in the 10-Q that you're referencing.

Got it.

And with that said, I think a good measure for its trajectory however is the sequential growth that you've seen between Q2 and Q3, which kind of speaks to the orientation of our product suite in enterprise payments. So within that sector, we provide embedded finance – embedded payments and banking solutions to integrated software partners and also third-party administration of funds. And within that segment we're one of the few if only that have nationwide money transmission licenses that support the business. So we have really been able to garner customers because of the quality of the tech certainly, but also the regulatory rigor that that segment has. We acquired the business under a belief that – and this is going back a couple of years, when we first began the transition of that business, it took the better part of a year to close and transfer the money transmission licenses but that we would enter an environment like the one we're in now, where countercyclical assets would be at a premium. And if you look at the growth that you're seeing at Priority while SMB is a market leader grabbing market share, the outsized growth numbers are coming from segments like our CFTPay product, which is helping consumers through debt resolution, which as you might expect in this environment is getting a lot of attention, a lot of new boards and a lot of new consumers opting on to our administration platform from our partners and we're seeing the benefit of that because they need the assistance. Separately, if you look at the growth in our CPX segment, which is really masked by the wind-down of that managed service customer, CPX on a stand-alone basis, which is our automated payables, product has grown by 69% – just under 69% year-over-year. So it's really the combination of those two areas just outsized growth. We do expect that to continue because as interest rates rise, as cash acceleration becomes important, while automated payables are getting adopted more quickly by businesses, the countercyclical assets we have in consumer finance and other segments that perhaps were resolved differently in a strong economic environment are benefiting us now. So – and that was part of the rationale. So hopefully, that gives you some insight but happy to follow-up if that requires more explanation.

Thank you very much.

Thank you. That will conclude our question-and-answer session. I'll now turn the call back over for closing remarks to Mr. Tom Priore. Please go ahead.

All right. Well like to thank everybody for taking the time to – for those of you who've been following the Priority story for continuing your interest. And for those on the call who are new to Priority, hopefully this was an insightful call to learn more about our platform and our mission to drive a unified commerce experience that we think is proving itself to be forward-looking and ahead of our peers within the payments segment. So I hope everyone has a great day, great weekend and coming up on the holidays is poised to enjoy those. Thanks very much everybody.

Thank you.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.