Priority Technology Holdings, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Positive Results: Record financial results driven by the unified commerce platform. Total customer accounts operating on the commerce platform exceeded $1.1 million, with nearly $127 billion in annual transaction volume and over $1.1 billion in average daily account balances during Q3.
• Segment Trends: Sustained positive momentum across all segments. Adjusted gross profit margin decreased 40 basis points year-over-year due to the Plastiq acquisition, but excluding the partial quarter impact, margins increased 16 basis points. Organic growth rates outperformed industry peers.
• Financials: Revenue grew by >20% y/y to $227 million. Adjusted EBITDA reached $54.6 million, a new quarterly record. Full-year revenue guidance is $875-$883 million (16% increase y/y), and adjusted EBITDA guidance is raised to $200-$204 million (18%-21% increase y/y).

Segment Performance

• SMB: Q3 revenue was $158.8 million, a $18.5 million or 13.2% increase from the prior year's third quarter. Bank card dollar volume in SMB was $15.5 billion for the quarter, up almost 10% from the comparable quarter last year. Adjusted gross profit in SMB was $35.6 million, up $1.1 million or 3.3% from last year's third quarter, with gross margins at 22.4% (down from 24.6% in the prior year's third quarter).
• B2B: Q3 revenue was $22.1 million, an increase of 58.3% or $8.2 million from the prior year. Adjusted gross profit in B2B was $6.3 million, a $1.2 million or 23.6% increase over Q3 of 2023. Gross margins were 28.5% in the quarter, up from 25.4% in Q2 2024.
• Enterprise: Q3 revenue was $47.1 million, an increase of $11.9 million or 33.9% from the prior year. Adjusted gross profit for the enterprise segment increased by 34.5% to $44.1 million, with adjusted gross profit margins at 93.6% in the quarter (up from 93.2% in Q3 2023).
• Consolidated: Revenue of $227 million increased by more than 20% from the prior year. Adjusted gross profit was $86 million, and adjusted EBITDA was $54.6 million, a 22% improvement from the prior year.

Guidance

• Revenue: Full-year revenue expected $875 to $883 million, a ~16% increase from 2023.
• Adjusted EBITDA: Raised to $200 to $204 million, an 18% to 21% increase from 2023. Organic growth rates outperform peers, highly recurring gross profit, and the differentiated Priority commerce engine support the revised guidance.

Risks

• Macroeconomic: Evolving macroeconomic environments and the impact of historically elevated interest rates on business performance.
• Regulatory: Regulatory changes in banking and payments that could affect operations and compliance.
• Integration: Challenges associated with integrating acquisitions like Plastiq, though operating leverage has improved sequential margins since Plastiq integration.

Question and Answer

Q: How does the change in administration and potential regulatory shifts affect the outlook?

A: It doesn't change the outlook significantly. Some sectors like debt resolution may see tailwinds, and interest rates are a key factor but the company is positioned to handle them.

Q: What's the trend in enterprise segment monthly new enrollments?

A: Strong enrollments with consistent organic growth, some seasonality but no abnormal changes, reflecting normal customer success in the market.

Q: Thoughts on EBITDA to cash flow conversion and leverage reduction?

A: Always evaluating opportunities to optimize the balance sheet, reduce leverage, and drive shareholder value through various strategies, including evaluating capital markets.

Q: Momentum of the Plastiq acquisition?

A: Plastiq closed in August 2023, doing $6-7 million in revenue per month currently, profitable, and integrated into the broader platform, continuing to grow.

Q: Competitive landscape in SMB?

A: Grabbing market share from peers, winning resellers, and driving growth with products like Priority Capital and passport banking, leveraging long-standing reseller relationships.