Good morning, and welcome to the Priority Technology Holdings First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Chris Kettman.

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 to everyone for joining us for our first quarter 2023 earnings call. Before walking you through our financial results, I’d like to highlight some key takeaways about current business trends. First, when reporting full year earnings back in March, we noted the business has been performing consistent with our Q4 trends. Even better, activity began to accelerate toward the end of March, and we ended the quarter on a substantially high note. We continue to grow market share in SMB acquiring and generated excellent results in both B2B and Enterprise payments. While other companies were pulling back in response to uncertain macroeconomic conditions and the recent banking turmoil, we remain committed to our vision for the convergence of payments and banking, driving priority aggressively forward on the strength of our countercyclical business lines that were positioned to benefit from higher interest rates and the macroeconomic pullback. Second, we continue to outperform our peers, both from a growth and margin expansion perspective. In doing so, we continue to strengthen our competitive market position for the future. Importantly, our second quarter performance remains on a similar trajectory to what we saw in the first quarter. Last, our decision last year to accelerate investment in Passport, our unified commerce API combining full featured payments and Banking as a Service continues to be rewarded in the marketplace, especially as underfunded fintechs and Banking as a Service providers have come under pressure and a crisis and confidence in banks continues among businesses of all sizes. We believe that the numbers demonstrate that Priority is well built to thrive in a somewhat dislocated environment, and the current pace of our new partner adoption of Passport to collect, store and send money will drive results going forward. With that as a backdrop,…

Thank you, Tim. As we wrap up our Q1 review, I wanted to reinforce a few of the more meaningful attributes that will continue to set Priority apart from others in the fintech and payment sector. First, as our performance demonstrates we are built for efficiency and our platform can support a diverse portfolio of software and payment assets that perform in a challenging economic environments. Second, our lean, focused technology stack is built for the future of payments and the accelerating convergence with banking functions that will drive above-market growth with minimal, if any, investment. Our products are positioned to capture new sources of revenue from banking and financial services embedded in emerging modern commerce business models. If there are those that question the veracity of this view, perhaps you might consider the recently announced partnership between Apple and Goldman Sachs to deliver banking function to Apple Card users, or Twitter’s reported intention to embed payments and banking into its commercial network to name a few. Meshing payments and banking functionalities will inevitably be table stakes in our sector. Last, we’re an organization that continues to operationalize vision. What I mean by this statement is that beyond the unwavering work ethic and commitment of our technology, service and sales, and operational support teams, we have dedicated effort and personnel to be at the forefront of evolving strategy and customer trends to deliver results day-in and day-out. We believe it is our clear informed vision and passion to execute that will deliver the long-term value our shareholders should expect. We appreciate you all taking the time to participate in today’s call and the ongoing support of our investors and analysts. Operator, we’d now like to open the call for questions.

[Operator Instructions] The first question is from Brian Kinstlinger of Alliance Global Partners.

Hi good morning guys, thanks for taking my questions and solid numbers. Transaction volumes have held up really nicely in light of the economy of numbers, especially that we’ve seen for other companies. Can you remind us roughly the percentage of revenue from consumer and retail, which I think is relatively low as a percentage of consumer payments. Then how are transaction dollar volumes in those verticals performing compared to your other verticals?

So, and just to clarify your question, you’re speaking specifically about the retail SIC codes in the SMB acquiring space?

Correct.

Got it, got it. Brian, really across verticals, our volume has been consistent. There’s certainly been no drop in retail. It’s kind of up in line with our overall performance. The results, as you can gauge from our new merchant boards have increased year-over-year from, call it, high 4,000s to consistently now over 5,100. We’re just winning market share in the acquiring space. If anything, we’ve continued to diversify our reselling partner channels. With some of the acquisitions we did earlier in 2022, we’ve also increased our direct sales activities. So the market share growth has really been the catalyst for our continued consistency in the SMB arena relative to our peers. I mean, Tim can give you – we’re just going to drill down into a little bit of specifics on the SIC codes that you noted. Tim O’Leary: Yes, Brian, there’s obviously more that goes into kind of broader consumer retail. But if I just look at what we categorize as retail trade compared to health care, legal services or other types of services, volumes in just straight retail Q1 of this year versus Q1 of last year were up over 10%.

Wow. What percentage of your revenue is consumer retail? Tim O’Leary: That retail – that same categorization is only – it’s just under 25% of the volume.

25%. Great, and then I want to follow-up on the comment on your merchant acquiring. You mentioned this quarter closing some nonactive merchants, so I’m clear on this quarter. But I started to review, you’ve been adding 14,000 to 15,000 merchants per quarter, but net adds have consistently been around $5,000 per quarter based on the total you report each quarter for the last many quarters. Can you talk about the churn? Are these small customers? Are they sometimes sizable customers? Are they generally nonactive? For the ones that aren’t nonactive, why do customers leave, if it at all? Tim O’Leary: Yes, I mean, look, obviously, we have some customers – it’s a competitive marketplace, so we’ll lose some high-volume processing customers. But overall, there’s – our book is exceedingly diverse. There’s not a single merchant that would come close to approaching even 1% of our volume, so in the SMB space. So most merchants are – you’re talking there in the tenths or hundredths of a percentage of our volume. So the impact is kind of muted from a standpoint of an individual large merchant leaving. We tend to clear out the dead wood, if you will. The merchants that tend to leave us – and look, you can look at our attrition on a revenue and volume basis, and it’s consistently in the 10%, if not lower range on a static pool basis. And what that indicates to you is merchants who are processing don’t tend to leave. And we find that’s because they rely on our technology to run their business. We’re not a terminal provider. We don’t chase after small merchants. Our merchants typically are processing bankcard volume alone, nearly $30,000 a month, which was on the higher end of the small merchant segment in the U.S. Statistically, we found that merchants that are processing less than $10,000 a month will leave you at twice the rate of merchants doing more than $10,000. And what that indicates, historically, is those are merchants that just – they don’t use technology because they’re very small and they don’t necessarily value it as much. So the penny here or there seems to be important to them, and they’ll leave for just pure price. So we tend to focus our distribution channels away from that. I think you’ve heard us talk about this. We’re very focused on making the relationship with Priority with our resellers, with our ISVs consultative in that we give them tools to really maximize their merchant networks. The stats prove out that while it takes a little more painstaking detail, that long game is a winner. So – hopefully that gives you some insight as to, one, how we think about it and what’s driving those results.

Great. Switching gears to the Enterprise side. I’m wondering if you can help break down – the growth has been great. So maybe break down the revenue growth between existing customers that are spending more or driving more fees versus new logos versus higher interest rates? Tim O’Leary: Yes, I can maybe start on the back end of that first. So if you think about the interest rates and the deposit balances, obviously, we saw nice growth in deposit balances throughout the quarter from kind of the traditional Enterprise business we’ve had historically, but also with the growth in Passport, right? You heard Tom mention – 18 new program managers came on board during the quarter, right? That benefits the deposit balances in Enterprise as well with the new Passport offering. So the combined effect of interest rates and deposit balances, we had $5 million of interest income in the quarter. That compares to $7.5 million of all of last year. So you can start to extrapolate what that means for the balance of this year, given where the interest rate environment sits with the asset [ph] activities.

Yes, and then maybe commenting on the other components of your question. We have – you may recall that we mentioned in the full year earnings, when talking about Passport, some of the impact from SVB’s fallout and how quickly we were able to onboard new logos. So certainly, a portion of the growth is from that. But we’ve also seen, let’s say, on a – let me give you some kind of timeline. The growth from existing customers on a year-over-year basis is probably 70%. So…

Great. Thank you for that color on the…

Yes. And I’ll say that – so think about that as from Q1 2022 levels to present levels.

Okay. Great. Last question I’ve got. Normally companies ask – normally, companies get questions on M&A. As I think about the last several years, you’ve taken strategic opportunities to divest businesses at times to delever. Is that right now something that is of Priority? Is it not really? Just trying to understand, is there an opportunity potentially to – with your asset base to delever at all?

Well, look, certainly, there is, right? If you were to just look at – we provide our financials at segment level detail. And we’ve purposely built the business as a single engine – Passport, to collect store and send money with applications devoted to fintech payment business segments to serve customers in those segments, right? MX Merchant, MX Merchant POS suite in SMB, CPX in the B2B vertical, and then, of course, CFTPay and the Passport API in the Enterprise segment. So each of those business segments are detachable without deconstructing the engine that operates the business. So we’re always considerate of what’s the intrinsic value of those segments to folks that operate in those segments and we compete with and may find that we offer some tools that they may not have. So I’ll say that, that’s something that we’re always considerate of, and we built the business to enable that way of thinking. And if we see levels that we think are – makes sense to either divest of an asset or even to divest of a portion of an asset. We’re going to do it if it makes sense, and yes, we would use that money to reduce debt and then probably a portion of it to figure out where we want to redeploy that capital to higher returns.

Great. Thanks so much guys.

Yes. Thanks, Brain.

[Operator Instructions] The next question is from Taylor Johnson [ph] of CGI. Please go ahead.

Good morning guys and thank you for taking my question. I know you mentioned that some competitors are retrenching in light of the economy. Meanwhile, you guys are moving forward with investments. So I’m just wondering if you’re seeing any new opportunities to take share from some of those competitors and what that landscape is like.

Yes, the – look, we are. If probably the sector that has gotten our attention the most is B2B. The B2B payment space – there’s been obviously a lot of enthusiasm around the segment in past years. And some companies that – they raised a lot of money, they’ve maybe not realized their growth goals and have not driven bottom line performance. We think there’s going to be a really excellent opportunity to acquire assets in that space. So we’re diligently looking at opportunities there. And then there’s, I would say, just broadly speaking, in fintech – and we’ve already done a few of these partnerships, I think, as they continue to evolve. These are emerging companies, that are software applications that have realized markets. Guys so these are not, what I would describe as solutions looking for a problem to solve. These are companies that really just got caught in kind of the current environment for venture capital and financing where they’re early stage, good applications in good sectors with real performance potential, but are shy of cash flow positive and need a little bit of assistance to get to the next level. We’re evaluating a number of opportunities there where we come in as an operating partner, and help them realize very quickly synergies for infrastructure. Things as simple as their AWS contract, their database framework and database management. Of course, we have all the back office capability, HR, finance, et cetera, and help these companies, I’ll call it, streamline, so they can focus on their core application. We can help them reduce OpEx and then, of course, leverage them through our distribution to drive – to cash flow positive. There’s a lot of opportunities that are emerging with that type of profile. They are because the venture…

Thank you so much for that color, that was really helpful. And just another question. Wondering if you could talk a little bit more about some of your new products, specifically including which you feel present the greatest opportunity as of right now.

Yes, I appreciate that. Well, look, the first one, I kind of alluded to them in our comments. The MX Merchant POS suite is – we think is going to really get to energize our distribution. There are a suite of terminals that are integrated to our MX Gateway that will enable all of the software functionality of our MX Merchant application on handheld terminals. And the terminals can be stand-alone, so they can work like a handheld POS at the table or at checkout. So very slick in that regard. They can also be semi-integrated where they work with MX Merchant, even if you have, let’s say, a different POS so they can inject into the point-of-sale that clients are using. And then a full on Enterprise, which is both the mobile terminal device and then works with all of our POS applications, which are MX Retail or MX Merchant Retail, MX Merchant Restaurant, Salon, which will be coming out soon, and then charity. As I mentioned, we also are going deep in the construction space. So we expect to launch a product called MX Merchant Build in the coming quarter. So that’s, I think, one of the really energizing things that are going on at Priority. And as I noted it’s, we know it’s needed. Just you can see just by virtue of the number of distribution partners that have signed up to start to sell that product as it comes to market through our wholesale distribution efforts. We’ve tested it in-house. That test has gone well. As I noted, just in the first quarter alone, we were selling internally over a couple of hundred. So when you consider we really only had it going for a couple of quarters, you’re looking at 100 a month is pretty…

Thank you so much. That was really helpful and say and thanks for taking my questions.

Thanks for the great questions.

This concludes our question-and-answer session. I would like to turn the conference back over to Tom Priore for any closing remarks.

All right, well, on behalf of the team at Priority, we want to thank everybody for taking the time to participate in this morning’s call. Special thanks to the analysts that continue to evangelize Priority, and of course, to our supportive investors. We’ll keep delivering results. Thanks very much.

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