Priority Technology Holdings, Inc. Q4 FY2024 earnings call

• Priority had the strongest revenue performance in history for Q4 and full-year 2024, growing net revenue by 16%, adjusted gross profit and EBITDA by 19% and 21% respectively. - Q4 revenue was $227.1 million, up over 14% y-o-y, with adjusted gross profit up 15% and adjusted EBITDA up 16%. - Full-year 2024 revenue was $879.7 million, adjusted gross profit $328.1 million, adjusted EBITDA $204.3 million. - Unified commerce platform streamlines payments and banking, resonating with partners. - Segment-level performance: SMB, B2B, Enterprise each detailed with revenue, growth, and profit figures. - Consolidated operating expenses: Salaries and benefits up 6.9%, SG&A down due to prior restructuring charge.

SMB generated Q4 revenue of $155.7 million, which is $15.5 million or 11.1% higher than the prior year's fourth quarter. Bank card dollar volume in SMB was $15.5 billion for the quarter, up 6.6% from prior year. Total card dollar volume was $18.1 billion, up 6.9% from prior year. Adjusted gross profit in SMB for Q4 was $32 million, up 0.4% from last year's Q4. B2B revenue of $23.7 million was an increase of $2.3 million or 10.9% from prior year. Adjusted gross profit in B2B increased to $6.4 million or 24% growth from prior year. Enterprise Q4 revenue of $48.7 million was an increase of $10.4 million or 27% from prior year. Adjusted gross profit for the Enterprise segment increased by 27% to $45.6 million, while adjusted gross profit margins remained relatively constant at 93.6% for the quarter. Adjusted EBITDA in Enterprise was $42 million for the quarter, an increase of 27% from prior year. Adjusted gross profit from B2B and Enterprise segments represented 62% of total in Q4, up from 50% in 2023.

• Forecasts 10% to 14% organic growth in revenue for 2025 to a range of $965 million to $1 billion. - Adjusted gross profit forecast to range from $360 million to $385 million, representing year-over-year growth up to 17%. - Adjusted EBITDA forecast to range from $220 million to $230 million, representing year-over-year growth up to 13%. - SMB expected to have high single-digit revenue growth, B2B low double-digits with over 20% growth in supplier funded strategies, Enterprise to continue momentum but with moderated growth expectations.

• Material weakness in internal controls over financial reporting related to automated controls, ingestion/validation of third-party data, and IT general controls. - Impact of lower interest rates and murky macroeconomic environment on 2025 performance. - Migration of some technology resources from CapEx to OpEx treatment affecting financials.

Q: Hi, guys. Congrats on the strong year, the balance sheet progress and special congratulations to John on his retirement. Just first, I want to touch on the capital allocation priority. You guys noted another $10 million worth of debt pay down in Q1. But how do you think about overall strategy between balancing kind of that principal pay down with maybe increased CapEx or SG&A spend on the income statement?

A: Thanks, Jacob. So similar to past quarters, we're going to continue to evaluate the best use of capital from a shareholder value standpoint. So debt pay down is obviously a key focus for us. We continue to hear from investors that, leverage is something they're focused on. So we'll continue to naturally delever both with growing EBITDA as well as using our free cash flow to reduce our debt balances. But we balance that by looking at M&A. We see a lot of opportunities in the market. Tom referenced what we're seeing out there from a lot of dislocation on certain other assets. So there's opportunities to be a consolidator, but we're going to balance that against leverage and how we use our capital. From an internal capital allocation standpoint, we've talked about converting some of our CapEx to OpEx, as we move more and more of our platforms to a common cloud basis, which puts burden on EBITDA in the short-term, but over time is going to add efficiencies as we get to a common back-end structure from a technology standpoint and development standpoint across all those platforms and you get better efficiencies across your developer team.

Q: So, it's great to see you've taken care of the liquidity overhang that we've discussed for a long time, and I'm glad to hear deleveraging is a key focus. While I know your consumer segment generally does not have a lot of retail and consumer product businesses you serve, still do you see any impact from tariffs on some of the businesses you're working with, basket sizes, demand in any other way? And if so, how at all did you handicap this in your guidance?

A: Yes. Great question. And look, it's something we have been setting up for, to be quite honest with you to benefit from. We don't see a lot of impact on the acquiring side of the business, because there the utilization of card, it actually increases the probability, because buyers are now, they're looking to pay on card to preserve working capital. So not only will the impact of tariffs sort of create inflation, the probability of utilization of digital payments actually increases and that's what we've seen. The area where we're most excited about candidly, is actually on the B2B side, because working capital is now getting constrained in that segment. So we're seeing a nice level of demand for buyer funded strategies and other efficiencies that are able to get created through automated payables, just because now the necessity continues to get greater. So that's where we're seeing actually the impact. And I hate to state the obvious and keep pounding away on it, but that's why we're not a monoline payments enterprise. We've created opportunities that are countercyclical and this is just one of them. So that's what we're seeing thus far. But obviously we feel like we've created a level of conservatism in the view of our financials for the year. So if we see adjustments, we'll be able to react quickly.

Q: Hi, good morning. Thank you for taking my questions. The first question I have is on the guidance you guys provide. I appreciate the segment-by-segment level. What are some of the factors that would drive you to the higher low end of the guide outside of the macro here? And is the Enterprise segment primarily going to be the primary driver on which end of guide you hit?

A: I think I'll let Tim speak to a handful of items. I would not -- it's not going to be driven just by enterprise now. I would say the things that will influence towards the top end of the range will be, as we start to get a sense of the impact of cross-sell in the SMB space, as Tim already noted, we're actually seeing good margin expansion on an organic basis once you factor in, I'll call it legacy portfolio acquisitions from back in 2018. Just to give you some context, many of those acquisitions were resellers who said, I want to be part of Priority's go forward and took shares as part of their acquisition, right? So as those run off, the cross-sell is really just beginning. That will impact us to the higher end of the range. The other is noting the B2B pickups, we're seeing in both buyer and supplier-funded strategies. Those will be impactful. And then lastly, your observation on enterprises, it is not wrong. As you see, it is the highest margin business because just it creates such a dynamic relationship with the customer that uses all aspects of our business from payments to banking, I'll call it money at rest, as well as other opportunities to monetize payouts through card strategies, debit card, what have you. Those segments are -- they're really just now picking up momentum in a major way. So higher win rate, faster conversions, they could definitely pull forward the revenue projections in a very, very meaningful way. So in an effort not to, I'll say predict timing, we've been real conservative in the way we've reflected what the business can do and have a high, high confidence in the numbers you see.

Q: Hi, guys. Good morning. Thank you for taking the questions. Wanted to start on enterprise versus -- hoping to be get on CFTPay and some of those countercyclical attributes. Can you talk about how you're projecting maybe the pace of build client adds here in enterprise as you move through '25 understand you have a growing base in the business here. But are you expecting anything in terms of pickup, given where overall revolving credit outstanding balances are? And just anything important when we think about things like charge-offs?

A: Yes. As you noted, right, this is -- I'll call, it's countercyclical to overall kind of the consumer spending. Look, there's been some interesting developments when you look at charge offs in the tiering of I'll just credit generally, right, who's spending and who's not. Sharing what I can, boarding trends have been very consistent coming out of the -- going into the New Year and then what we've seen through Q3 and Q4. So if anything, we've probably aired more to the conservative side of our modeling of boarding trends. Look, they're at a historically high level. I don't think they come off that level, but we've been judicious in the way we've projected it, perhaps not to remain quite so high. But based on the economic environment, it certainly doesn't appear a let up is likely. I also think this segment, what I'll define broadly as consumer wellness has systemically changed where there will be more customers eligible for resolution products to help them merge from debt issues and that's just because the environment has changed for credit counseling and other kind of consumer wellness oriented products, which is driving a larger base of consumers to a resolution partner. So that's I think that's permanently going to benefit the sector, to be candid. But that optimism is -- I would say that optimism is not things we've built into our projections. So to the extent we're right, it'll accrue to the upside.

Q: I see that you included an adjusted EPS figure in your earnings release, but it wasn't something that you discussed in your prepared remarks. Is that a figure you're going to continue to provide going forward? And is there any guidance you can offer on 2025 expectations?

A: Thanks. No, good question. So it's yes, we put out adjusted EPS this quarter. Obviously, the GAAP EPS was impacted by a couple non-recurring items, including debt modification costs as we took out the preferred equity during the year. We raised incremental capital to do that. And then, there was also the acceleration of the unamortized discount on the preferred equity. So that had an impact, which is why we ultimately showed the adjusted EPS, which for the quarter was $0.18 and $0.51 for the full year. We'll continue to provide that figure as our tax rates start to normalize. We had a 35% effective tax rate this quarter. Over time, as we continue to become higher profitability and start to work through some of the allowances against that with 163-J and other items, that tax rate will more closely approximate 30%. So I think EPS becomes a more relevant factor for us. We haven't put out official guidance for '25 from an EPS standpoint, but we finished '24 with $0.51 and I think you could easily see that number doubling closer to $1 a share based on just kind of normal course growth from $0.18 to Q1 and Q2 of $0.25. So I think $1 a share is a good approximation for where we would see it.