Priority Technology Holdings, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with the three months ended March 31, 2021 unless otherwise noted. Priority provides merchant acquiring, payment software, money transmission and commercial payment solutions. Figures are in U.S. dollars; financial statement amounts are in millions unless otherwise indicated.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Revenue | $153.2 | $113.3 | Up 35.3%, reflecting higher processing volumes and 2021 acquisitions, particularly Finxera |
| Operating expenses | $142.4 | $108.8 | Up 30.9% |
| Operating income | $10.8 | $4.5 | Operating margin was 7.1%, versus 4.0% |
| Interest expense | $11.5 | $9.2 | Increase mainly reflects acquisition-related borrowings |
| Net loss | $0.3 | $2.7 | Loss narrowed |
| Dividends and accretion on redeemable preferred stock | $8.4 | — | Common-stockholder loss was $8.7, or $0.11 per share, versus $2.7, or $0.04 per share |
| Operating cash flow | $9.6 | $9.1 | Cash flow statement reclassified customer settlement movements to financing activities; prior-period presentation was adjusted |
| Investing cash flow | $(5.7) | $(5.7) | Includes $2.4 of loans to ISOs and $2.4 of property, equipment and software additions |
| Financing cash flow | $2.5 | $(26.8) | Includes a $12.7 increase in net customer-fund obligations, debt repayments and preferred dividends |
Business and material changes
- Merchant card fees were $128.0, up 18.8%; money transmission revenue was $16.3, primarily from Finxera, acquired in September 2021. Outsourced and other services revenue rose to $7.1 from $4.4.
- SMB Payments revenue grew 19.1% to $130.0, but segment operating income declined 6.0% to $12.5; management cited higher commissions to larger partners and portfolio contraction. Processing dollar value increased 18.5%.
- B2B Payments revenue rose 69.3% to $5.9 and the segment moved from a $0.4 operating loss to $0.4 operating income.
- Enterprise Payments revenue increased to $17.4 from $0.7 and operating income to $4.5 from $0.2, principally due to Finxera. The acquisition also contributed significantly to higher amortization.
- Costs of services increased 24.0%, slower than revenue growth; they declined to 66.2% of revenue from 72.3%. Salary and benefits rose 68.4%, and depreciation and amortization rose 91.3%, largely reflecting acquired businesses and intangible assets.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $13.6, versus $20.3 at year-end; restricted cash was $13.6. Customer account balances of $497.4 and related obligations are included in current assets and liabilities and are not available for general operations.
- Working capital was $18.9, down from $19.6 at December 31, 2021. Accounts receivable increased to $72.9 from $58.4.
- Debt principal totaled $625.4: $615.4 under the term facility and $10.0 under a $40.0 revolving facility. Net long-term debt carrying value was $598.4 after current debt and unamortized discounts and financing costs. The term loan bears 6.75% at quarter-end and matures in April 2027; the revolver matures in April 2026. Approximately $30.0 of revolver capacity was available.
- Redeemable senior preferred stock had a carrying value of $215.1. Its stated dividend rate is 13% annually; $3.5 of dividends were paid in cash and $4.1 accrued during the quarter. Preferred dividends and accretion materially widened the loss attributable to common stockholders.
- Management stated that cash, operating cash generation and available revolver borrowings should cover working capital needs for at least the next 12 months. The company reported compliance with financial covenants at March 31, 2022.
Outlook, risks and notable items
- The filing provides no specific revenue, earnings or other numerical guidance. Management’s liquidity outlook is subject to estimates, including uncertainty around the effects of COVID-19.
- Key risks identified include competition, reliance on distribution partners and third-party processors, system interruptions and data security, regulation, card-network rules and fees, and risks associated with acquisitions.
- Revenue is substantially derived from Visa and Mastercard transactions and depends on sponsorship agreements with member banks. A majority of cash and restricted cash is held at financial institutions in amounts above FDIC insurance limits.
- Minimum third-party processing commitments are approximately $15.7 in 2022 and $16.6 in 2023. Ordinary-course legal matters were not expected to have a material effect, although a future probable and estimable loss could be material.
- No goodwill impairment was recorded, and management reported no impairment triggering events at quarter-end. The company noted that COVID-19’s duration and effects remain uncertain and could affect asset recoverability and liquidity.
Most important facts for investors to verify
- Whether processing-volume growth and Finxera’s contribution translate into sustained earnings and cash generation, particularly given lower SMB Payments operating income.
- The company’s leverage, interest burden, covenant headroom and access to the revolver; verify how variable rates and future maturities affect debt service.
- The 13% preferred dividend burden, accumulated preferred balance and potential effect on common-stockholder returns and dilution.
- How much reported cash is restricted or represents customer funds, and the extent to which working capital and liquidity depend on settlement balances.
- Whether acquisition-related amortization, contingent consideration and minimum processor commitments materially affect future margins and cash flow.