Priority Technology Holdings, Inc. (PRTH) Earnings Call Transcript & Summary

Thank you, everyone, for joining our fireside chat with Priority Technology Holdings. Priority is a payments technology company that leverages a purpose-built platform to enable clients to collect, store and send money, operating at scale. Priority helps its customers take and make payments while managing business and consumer operating accounts to monetize payment networks. Today, I'm pleased to introduce Tom Priore, Executive Chairman and CEO of Priority; and Tim O'Leary, CFO of Priority.

Thanks, [ Scott ]. Thanks for having us, [ Scott ].

Tom, thanks for being with us today. Priority had an impressive Q1 with 21% year-over-year revenue growth and reaffirmed its full year guidance. Can you talk a little bit about the demand environment across your businesses?

Yes, sure. We've been fortunate to see strong demand really across our 3 operating segments. Unlike some of our peers in SMB payments, we've seen close to 20% volume growth. And that's really coming on the heels of winning market share. Consistency in our products being adopted by the small merchant community in the U.S., we're consistently boarding north of 5,100 merchants a month. That's up from last year as well. We're -- that segment is just kind of winning on the strength of its products. On the B2B segment, it's pretty early innings in that industry, we think, generally, but we are seeing continued margin expansion in that segment. Volume is growing on our existing logos, and we're winning new contracts across the middle market and institutional space for automated payables. And then lastly, our enterprise business has really seen kind of the greatest adoption. We have a deep platform in consumer finance payments, and in the environment that's been challenging for the consumer finance sector generally, we tend to do well, and we're doing well as a result. And then we've also seen just in the beginning of the year alone, 18 new partners join the platform and start to move their volume through. So Tim, I think, can go into a little bit more the granular financial tale in each segment. But we've been fortunate that it's been broad-based.

Great. So diving into your segments, let's maybe start with the big one, SMB payments. That business grew 19% year-over-year in Q1, which is very impressive. Can you talk a little bit about what are the top drivers of growth in SMB payments and do you see any near-term headwinds just given the macroeconomic environment?

Yes. I think the growth has been really broad-based. I think Tom has already mentioned some of the boarding trends we're seeing, and we do continue to see our distribution channels operate very effectively, right? So adding an average of over 5,000 merchants a month, right, so that continues to grow the total merchant base. So we're up over 260,000 merchants today across the SMB portfolio, and that's driving the volume growth, right? We had volume growth. We had transaction count growth, and all that contributes to what we're seeing on the revenue side, where the business continues to grow at a very nice strong organic pace. As far as some of the headwinds, I think the broader macro market is certainly starting to show its impact across the sector. All the rate increases from the Fed has started to impact some of the consumer spending. I think the benefit for us though is our portfolio is very -- it's very diversified, very broad. There's really no concentration as you think about industries. In some ways, we've got nice defensive areas in there where we're probably less concentrated to restaurants than the broader payments industry might be, which we haven't seen the impact through there yet. And then we've got legal services and other areas that have continued to be very defensive for us and growing nicely.

And maybe to put some fine-tuning on that on the current environment. Tim noted, our book is 17% in the hospitality space, which small restaurants probably make up 1/3 of all small businesses. So the underrepresentation there is -- by the way, it's intentional. The other thing I would just note, if you look across our SMB book, close to 80% of our volume is either what you'd consider integrated or semi-integrated. We're not supporting a distribution network that is out pushing terminal solutions. These are software solutions. They leverage our MX Merchant and MX Merchant POS platform to -- really to manage their business. And that enables us 2 advantages. One, it's very sticky. Our attrition is historically below 10%, which is less than half the industry average. So we're not kind of chasing money that's leaking out of the bottom of the bucket every year. The other thing that is significant is we are selling software solutions to larger businesses. Our average customer is doing probably 30,000 to 35,000 of bank card volume a month. That's large within the SMB segment. So these are business they need technology solutions. And we've cultivated a distribution network that understands that is a value-added group of resellers, and they do an outstanding job being consultative, and that makes a difference in difficult markets.

Yes. Very helpful. Maybe turning to the B2B payments business. On your last earnings call, you spoke about the evolution of the business mix, the wind-down of a large managed services contract. Can you talk about B2B in general? Where do you see the growth opportunities in the industry and also in your business going forward?

Well,look, we've always had the view of B2B that we're still in early innings, number one. And so we've been very measured about how we've invested. As a result, we have one of the few B2B divisions that is profitable. We're driving net income to the bottom line, while most of our peers are still burning capital, which we're -- I'll say we're picking our spots. And one of those spots was announced today. We are the stalking horse bidder in a restructuring of Plastiq, which is, we think, a really exciting B2B technology but maybe was underoptimized for the environment. And we can now bring resources to help optimize that within our vision for B2B, which needs to be one that is not network-oriented. We think that's a mistake. And we think the market is proving that out. And what I mean by that is not every supplier is going to sign up to accept payment, just to automate their receipt of their invoice. It's very situational. And the reason is because buyers have different deals in procurement with their suppliers. Not every network is identical. So we take more of a bespoke approach. We curate those merchant networks between the buyer and their suppliers, and we now are doing that not just with a supplier-driven automated payable solution. As we add Plastiq to the mix, which is a buyer-driven solution, it will all be housed in one place. And we think that's an important part of the successful strategy in B2B: be very bespoke-oriented, curated for big buyer and supplier networks, and you also have to have a full suite. We're not just a virtual card issuer, not just a card player. So you mentioned in the opening, we're a collector and send engine. We have money transmission licenses nationwide. We handle lockboxes. Any form of payment that we want to make to automate or a buyer wants to make to automate their payables, we can handle in one place. And that's a differentiator and, we think, drives our profitability in our margin, which is now approaching 70% in that business.

Yes. Well, it's great to see the announcement earlier today with Plastiq. Can you talk a little bit more about Plastiq and the strategic rationale of doing that deal? And it seems to be a lot of overlap between your SMB customers and Plastiq's customers.

Yes, without question. I mean their core constituent is small businesses that are looking to utilize their credit to improve their cash flow. And we're already an existing service provider to Plastiq. So this is really a layup for us. But we're excited to start bringing those tools out to our SMB universe. We think it's a great cross-sell opportunity for our base. And they've built a really impressive technology to help small businesses manage their payables, which complements our kind of more enterprise-oriented solution really beautifully.

Great. And maybe we could pivot to the enterprise payment segment. Enterprise payments grew an impressive 57% in Q1, which is incredible. Can you talk about the solutions you provide in enterprise payments and some of the market tailwinds that you're seeing?

Yes, sure. And I'll let Tim dig into a little bit of the particulars on performance here as well. The growth has really been driven by a couple of conditions. We were -- we have been touting this business as a countercyclical one that we felt would really do well as the economy started to turn downward. It was very intentional in us getting into the business. We've been talking about the probability of a -- I'll call it, of a recessionary or certainly economic pressure evolving for the better part of 18 months to 2 years. So we endeavored to set up for it with a business that helps consumers resolve outstanding debt, and in an environment like that, as you might -- like we have today, you might imagine that. That's kind of top of mind for a lot of consumers. So we've seen tremendous enrollment in that segment. And then as we've rolled out a full set of APIs for integrated partners, so these are everything from real estate software to construction software to other bill payment and payables platforms, they're now leveraging our engine to collect, store and send money. And we're getting the benefit of that growth. We have 18 new partners that have come on board since Jan 1. So it's the -- it's really been driven by that new partner adoption and the macroeconomic environment where we're just going to naturally see a lot more consumer enrollment through the integrated partners we have, which is now well north of 50, well north of 50, so...

Yes. I think the other tailwind there is that business, it drives deposit balances, right? So we have over $600 million of deposit balances that we manage through a network of 13 or 14 partner banks where we have those deposits in FDIC-insured accounts, and we capture interest income on the float, right? Obviously, with the tailwinds behind rates, that's really been a benefit for us, and we'll continue to see that for the benefit of this year. And then just the continued growth in new enrollments, right, we continue to add to the overall customer base there. And we really haven't seen that signs -- any signs of slowing. If anything, it's accelerating.

Yes. That's exciting. Maybe we could switch gears and talk about the competitive environment a little bit. Overall, in terms of competition, how do you think about competition in the verticals that you're in or in the segments you're in? And can you talk a little bit of any changes you've seen in the last year or so?

Yes. Look, and I hate to be cute in this remark, but we really don't think about our competitors. And that's not to be dismissive towards them. It's just that they don't drive our decision-making. We've had a vision that we felt payments and banking would converge. A lot of people call that embedded payment. We think -- or better payments. We think it's much more than that, where modern networks are not just about card payments any longer, right? They're commercial networks, and banking -- banks do this great. They store that money for a period of time and allow companies to then decide how they want to manage their money, right? So we felt it's only natural to add that to our breadth of offerings in the market. And I'd say that's really what we focused on from, I'll call it, the competitive landscape, is what's the evolution of how commercial network should operate and do we have the tools to deliver. And I think it's starting to become very clear that, that modern delivery of payment solutions, and I would actually call them like cash acceleration solutions, right, which is really what we should be sort of endeavoring to do as payment companies, just requires a banking capability. It requires a banking expertise. So we brought that all together with nationwide money transmission licenses, a banking-as-a-service capability. So it's -- that's where our competitive mindset is, is making that a differentiated platform or engine to move money and then plugging that in across our channels so that our customers can go to one place to have really all their money flow through their business. And when it needs to stop for a minute, it just stops with us, and they can redisposition it however they want. And we're there now. We can handle. We have managed checks. We have our own ACH Fed connection, and it's why we're driving the kind of deposit growth that we're benefiting from as well that Tim noted.

So you mentioned -- you've talked a little bit about the convergence of payments and banking-embedded finance. And you've mentioned on your earnings calls that Priority is a unified commerce platform. Can you give us some use cases or examples of how your customers use all these capabilities and tools in the toolkit to collect money, store money and send money?

Yes. That's great. Well, I'll typically go into SMB to -- let's reverse it, make it a little interesting. So you mentioned Plastiq, right? So we just acquired, I told you they're a customer. Well, they're paying bills, really on behalf of small businesses. And the benefit they provide that small business is utilizing their credit to pay the bills, use Plastiq to process a card transaction for all of their payables, okay? Well, that money needs to sit for a moment while it is determined. Well, how does that supplier want that money? Do they want to buy ACH? Do they want to buy wire? Do they want to buy check. Well, our engine does all of that in one place, brings the money in on card, hold it for a moment safely in FDIC-insured accounts, then can send out checks, send out wires, ACH, even virtual cards to the extent that, that becomes a future thing within that platform, right? So all of that's handled in one area on -- for an ISV like Plastiq. Well, we have a host of other ISVs just signing up to say, "I want to use that engine to do that. That's what I really want because right now, I've got to connect to 3 different places to try and make that happen. And I got to send files to my bank. I don't want to do that anymore." So it becomes a much more simplified approach to moving money if I'm in the construction industry and I need to resolve payment to a host of contractors, right, or I'm in the real estate payments business. And not only do I need to collect from renters, but I've got a lot of things I need to do at the property to manage that property, right? It becomes a really compelling solution in that environment. That's one way. In B2B, just straight up supplier demand. Well, imagine instead of having to go and reach out to every single supplier to understand how they might want to accept payment because we have money transmission licenses and we can qualify all that information to the buyer, we can give them a payment wallet literally within minutes, thousands, tens of thousands, hundred thousand of them. I've got a colossal network. It's done. It's already built. Now it's just a matter of, hey, how do I, as part of procurement, get my supplier to accept funds in one form or another? How are we going to manage that? So it starts to enable buyers to look at their supplier networks differently to monetize them differently, okay? In the SMB space, it's -- I'd say it's kind of a pedestrian approach really. We're already handling 90% of our customers' AR. We'll just give them a bank account that's FDIC-insured. It sits on our Passport platform. They can write checks from it. They have a debit card linked from it to make payments. It's -- and it's done the moment they sign up their merchant account with Priority. That is now in beta, and that will be the future. And it should be. It just makes it a lot easier for SMBs to operate. So look, it's one of the reasons why we think there's going to be a lot more competition in payments, you mentioned it, from banks, I think. And they're starting to realize these are great potential deposit generators. And a lot of them got out of payments in the past. We think they're going to get back in. Your bank, for one, has doubted it, I think, very, very thoughtfully, so If I may.

Yes. It's a great segue to the next question. Given the current banking environment, what's going on with regional community financial institutions, how do you think that's going to affect the payments industry going forward? And what do you see in terms of -- you're going to benefit from that or competition in the future?

I'll offer my thoughts and invite Tim because he's very close to many of our banking relationships, particularly as we manage deposits. Look, I -- the -- we think the banking sector generally is going to start to chase payments as a business line in ways they had in the past. And we're already seeing that just with the management of our deposits. We control 0.5 million deposit accounts and that's a pretty attractive relationship for most banks to have. So there's competition to -- if you think about what we're building at Priority, it's, in many regards, a virtual bank branch, right? It generates a lot of deposits that stick around for a while. So we're looking to certainly maximize the opportunities in the current environment that are going to continue to play out over the next couple of years. Banks are going to be challenged to generate deposits and fee income. And those are 2 things we do really, really well, really well. And what your thoughts are, Tim?