Priority Technology Holdings, Inc. Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Aggregate Performance: Priority had strong Q1 2025 results with net revenue growth of 9%, adjusted gross profit growth of 14%, and adjusted EBITDA growth of 11%. Ended Q1 with over 1.3 million total customer accounts, up from 1.2 million at year-end 2024. Annual transaction volume increased by $5 billion to over $135 billion, and account balances under administration improved to $1.3 billion.
• Unified Commerce Vision: The Priority Commerce engine streamlines collecting, storing, lending, and sending money, offering a flexible financial toolset for merchant services, payables, and banking and treasury solutions. The partner integration framework with payments and banking API is consistently applied across various industry segments.
• Remediation of Material Weakness: Progress made in remediating automated controls deficiency related to third-party processors data. Testing of existing data translation controls in a non-production environment with plans to move to production once certified.

Segment Performance

• SMB Segment: Q1 2025 revenue was $151.7 million, a 5.3% increase from the prior year. Adjusted gross profit was $33.1 million, up 3.9% year-over-year. Adjusted EBITDA was $25.7 million, up 2.7%. Total card volume was $17.7 billion, up 3.4% from the prior year.
• B2B Segment: Revenue was $23.9 million, a 12.1% increase from the prior year. Adjusted gross profit increased to $7.3 million, a 17.8% jump from the prior year. Adjusted EBITDA was $3.5 million, a 101% increase over the comparable period in 2024.
• Enterprise Segment: Q1 revenue was $50.1 million, a 22.2% increase from the prior year. Adjusted gross profit was $46.9 million, up 22.2% year-over-year. Adjusted EBITDA was $42.4 million, a 22.2% increase from the prior year's first quarter.

Guidance

• Priority maintains full-year financial guidance from Q4 2024 earnings call, expecting 10% to 14% top-line revenue growth to a range of $965 million to $1 billion, and adjusted EBITDA of $220 million to $230 million in 2025.
• Confidence in achieving guidance comes from the value of the unified commerce platform and continued favorable shifts in business mix, despite macroeconomic headwinds like lower interest rates.

Risks

• Material Weakness: Design and operating deficiencies in automated controls around ingestion and validation of third-party processors data, though remediation efforts are underway.
• Macroeconomic Uncertainties: Impact of tariffs, government cuts, and interest rate changes on consumer spending and business behavior, which could affect financial performance.

Question and Answer

Q: Quick question on expenses. SG&A dollars and salaries and benefits rose about $5 million in spending sequentially, and details on cloud migration and other expense variances?

A: Tim O'Leary explained SG&A was up about 26% year-over-year when normalizing for non-recurring items, with a million or so related to public cloud migration. Salary and benefits driven by headcount additions. Going forward, focus on efficiencies.

Q: Comment on Q1 this year versus last year having one last day and Easter impact on volume and revenue?

A: Tim O'Leary noted one last day this year compared to Q1 last year impacted SMB daily revenue, with about $1.6M-$1.7M impact. Also, President Carter's funeral had some abnormal influence.

Q: Seen any notable changes in consumer or small business behavior due to tariffs and economic uncertainty?

A: Tim O'Leary stated nothing material yet, as Liberation Day came after the quarter, and volume trends remain relatively consistent with a resilient customer portfolio.

Q: Parse out countercyclical payments exposure in end markets like doctors' offices, lawyers?

A: Tim O'Leary mentioned restaurants make up mid-to-high teens of volume, retail in high 20% range, with half of volume in recession-resistant end markets like legal services and doctors' offices at over 16-17% of the portfolio.

Q: Anticipated free cash flow and capital deployment priorities?

A: Tim O'Leary said about $20 million of free cash flow in Q1, expecting consistent levels through the year. Focus on deleveraging and remaining nimble for value-enhancing opportunities