Priority Technology (PRTH) - 2022 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported a record revenue of $166.4 million for Q3 2022, an increase of almost 26% year-over-year, leading to a nearly 50% increase in gross profit to $58.5 million and a 48.7% improvement in adjusted EBITDA to $35.1 million [8][10][39] - Year-to-date revenue increased by 31.1% to just over $486 million, with organic growth of 12.7% in Q3 and 17% year-to-date, excluding the impact of the Finxera acquisition [9][10] - Adjusted EBITDA for the first three quarters of 2022 was up over 60% to $100.5 million, with gross margin increasing by 540 basis points to 34.1% [10][39] Business Line Data and Key Metrics Changes - The SMB payments segment reported revenue of $139.9 million, a 12.1% increase year-over-year, driven by a 9.2% growth in bank card dollar volume [25] - B2B payments revenue increased by 16.5% to $4.9 million, with significant growth in the CPX product, despite a decline in managed services revenue due to a customer wind-down [16][26] - The enterprise payments segment saw revenue of $21.7 million, a significant increase from $3.6 million in Q3 2021, primarily due to the full quarter effect of the CFTPay acquisition [28] Market Data and Key Metrics Changes - The company serves over 254,000 active SMB merchant accounts and processes total annual payment volume exceeding $110 billion, with more than 80% derived from integrated software connections [11] - The company is positioned to benefit from the growing embedded finance market, projected to reach $51 billion by 2026, with B2B payments expected to grow significantly [49][50] Company Strategy and Development Direction - The company is accelerating investments in banking product initiatives to capitalize on rising interest rates and market demand for integrated payment solutions [13][20] - The focus is on developing the Priority passport offering to deliver a full suite of proprietary payment and banking solutions, particularly in the SMB and B2B markets [14][56] - The company aims to maintain a competitive edge by investing in technology and resources while others may be retrenching due to economic pressures [20][56] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the potential for a prolonged economic downturn but emphasized the company's strategy to invest in new revenue channels that are expected to benefit from the current economic environment [20] - The company remains confident in achieving full-year revenue guidance of $650 million to $665 million, despite adjusting adjusted EBITDA guidance to $140 million to $145 million due to increased investments [13][45] Other Important Information - The company reported total debt of $618.3 million, with a reduction of $10 million since the end of Q2 2022, and net debt of $605.2 million [41][42] - The company has a strong liquidity position with $34 million of borrowing capacity under its revolving credit facility and $12.7 million of unrestricted cash [42] Q&A Session Summary Question: Expected launch of Banking-as-a-Service offering and risk management - Management indicated that some aspects of the offering are already launched, with beta testing expected in Q4, and emphasized robust fraud checks and controls for instant funding [59][61] Question: Revenue contribution from retail or consumer products - The largest segments include legal services and hospitality, with significant contributions from B2B sectors like salons and medical providers [62][64] Question: Growth expectations in consumer payments business - Management expressed confidence in sustaining growth driven by market share gains and the introduction of embedded finance tools [65][66] Question: Managed services revenue decline and Q4 guidance - Management clarified that while managed services revenue is declining, it is being replaced by higher-margin enterprise revenue, contributing to expected EBITDA growth [69][78] Question: Competitive advantage of CFTPay and future growth rates - Management highlighted the strong sequential growth of CFTPay and its unique market positioning due to nationwide money transmission licenses, expecting continued growth in the segment [84][90]