Priority Technology Holdings, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. Priority provides merchant acquiring, integrated payment software, money transmission, and commercial payment solutions. Unless indicated otherwise, financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $185.0 million | $153.2 million | +20.8% |
| Operating income | $16.8 million | $10.8 million | +$6.0 million |
| Operating margin | 9.1% | 7.1% | +2.0 percentage points |
| Net loss | $0.5 million | $0.3 million | Loss increased $0.2 million |
| Net loss attributable to common stockholders | $11.8 million | $8.7 million | Loss increased $3.1 million |
| Basic and diluted loss per share | $0.15 | $0.11 | Loss per share increased $0.04 |
| Net cash provided by operating activities | $27.7 million | $9.6 million | +$18.1 million |
| Capital expenditures | $5.0 million | $2.4 million | +$2.7 million |
Revenue growth reflected higher volumes across segments. Merchant card fees rose 17.0%, money transmission services 31.3%, outsourced and other services 54.9%, and equipment revenue 57.9%. The increase in outsourced and other services included higher interest income as rates and deposit balances rose.
Operating expenses increased 18.1% to $168.2 million, including cost of revenue of $122.0 million, salary and benefits of $19.0 million, depreciation and amortization of $18.0 million, and SG&A of $9.1 million. Interest expense rose 53.9% to $17.7 million, which more than offset the improvement in operating income and contributed to the net loss. The effective tax rate was 20.8%, versus 49.4% in Q1 2022; management attributed tax-rate differences primarily to valuation allowances on business-interest carryforward deferred tax assets.
Segments and material year-over-year changes
- SMB Payments: Revenue grew 19.2% to $154.9 million, while operating income declined 4.0% to $12.0 million. Operating margin fell to 7.8% from 9.6%, reflecting mix-related margin compression and higher personnel and operating costs, partly offset by revenue growth.
- B2B Payments: Revenue declined 52.5% to $2.8 million, and the segment recorded an operating loss of $0.8 million versus income of $0.4 million. The decline reflected the wind-down of managed-services programs and revenue recognized in the prior-year period related to a contract termination.
- Enterprise Payments: Revenue increased 56.9% to $27.3 million and operating income rose to $12.7 million from $4.5 million. Growth was attributed to customer enrollments and higher interest income; operating margin increased to 46.4% from 25.9%.
Cash, liquidity, and debt
- Cash and cash equivalents were $15.9 million at quarter-end, with an additional $11.0 million of restricted cash. Working capital was $8.9 million, down from $22.5 million at December 31, 2022.
- Management said cash on hand, operating cash generation, and revolver availability should meet working-capital needs for at least the next 12 months. Approximately $33.5 million was available under the revolving credit facility.
- Reported cash and restricted cash increased $77.6 million to $638.2 million, but this total included $611.3 million of customer/subscriber balances held for settlement and not available for day-to-day operations. Financing cash flow included a $79.3 million increase in net obligations for funds held on behalf of customers.
- Debt obligations were $615.7 million gross ($598.5 million net of unamortized discounts and issuance costs), compared with $623.2 million gross at year-end 2022. The term facility carried a 10.70% rate and matures in April 2027; the revolver carried a 9.59% rate and matures in April 2026. The company reported covenant compliance; the leverage test was not applicable at quarter-end.
- Redeemable senior preferred stock had a carrying value of $235.4 million and a 16.7% dividend rate at March 31, 2023. Preferred dividends and accretion attributable to preferred holders totaled $11.3 million in the quarter, materially widening the loss attributable to common stockholders.
Outlook, risks, and unusual items
- No specific revenue, earnings, or other numeric guidance was provided. Management’s stated liquidity expectation is that available resources will cover requirements for at least 12 months.
- Interest-rate exposure is significant: higher rates increased quarterly interest expense, while also contributing to higher interest income in parts of the business. The floating-rate debt and preferred dividend rate can affect future results.
- The company received a $2.7 million partner-bank invoice for services related to Q1 2022; it disputed $2.3 million and had not accrued an amount as of March 31, 2023 while review continued. The ultimate liability was not estimable in the filing.
- Commitments included approximately $13.0 million of minimum third-party processing fees in 2023 and $7.0 million in 2024, vendor-service purchases of $1.5 million in 2023 and $2.3 million in 2024, and $26.0 million of committed subsidiary capital contributions as of quarter-end. The filing states these contributions are due within 10 business days after notice.
- Ordinary-course legal claims were not expected by management to have a material effect, but the filing notes a future accrual could be material if an unfavorable, estimable loss becomes probable. Most cash and restricted cash was held at financial institutions in amounts exceeding FDIC insurance limits. Revenue also depends substantially on Visa and Mastercard transactions and sponsor-bank relationships.
- The company reported no material changes in market-risk exposures since year-end, no impairment indicators for goodwill or intangible assets, and effective disclosure controls as of March 31, 2023.
Important facts for investors to verify
- Whether revenue growth and Enterprise Payments’ margin improvement continue, and whether SMB margin pressure or B2B program wind-downs persist.
- How floating-rate debt costs and the preferred stock’s high dividend burden affect cash available to common stockholders.
- Whether the disputed partner-bank invoice results in a liability, and the timing and funding of committed subsidiary contributions and other contractual payments.
- The distinction between reported cash-flow totals and cash available for corporate use, given the large customer settlement balances.
- Future covenant-test applicability and compliance, as well as any changes in revolver availability or debt interest rates.