Priority Technology Holdings, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Aggregate Performance: Priority grew net revenue by 6%, generated adjusted gross profit and adjusted EBITDA growth of 10% and 6% respectively, and increased adjusted EPS by $0.10 or 56% year-over-year to $0.28 in Q3. Customer accounts increased to over 1.7 million, and annual transaction volume and average account balances under administration grew.
• Segment Insights: Strong results in Payables and Treasury Solutions, but Merchant Solutions growth moderated due to macroeconomic factors. Revenue growth projection for full year revised to 8%-10% from 10%-12.5%.
• Strategic Updates: Renamed operating segments for clarity, acquired Boom Commerce and Dealer Merchant Services, launched a residual financing facility. The Commerce platform aims to streamline money movement and has recurring revenue prospects.
• Vision: The Connected Commerce platform is designed to accelerate cash flow and optimize working capital, with a focus on expanding into new markets and enhancing profitability.

Segment Performance

• Merchant Solutions: Q3 revenue was $161.9 million, 2% higher than the prior year's Q3. Adjusted gross profit was $35.5 million, consistent with Q3 of the prior year, with a gross margin of 21.9% (50 basis points lower than the comparable quarter last year). Adjusted EBITDA was $27.7 million, down $900,000 or 3.2% from the prior year.
• Payables: Q3 revenue was $25.2 million, 13.6% higher than the prior year's Q3. Buyer-funded revenues grew 11.8% year-over-year to $20 million, while supplier-funded revenues grew 21.3% year-over-year to $5.1 million. Adjusted gross profit was $7.2 million, a 13.6% increase over the prior year. Adjusted EBITDA for the quarter was $3.5 million, a $1.5 million or 79% year-over-year increase.
• Treasury Solutions: Q3 revenue was $55.7 million, an increase of $8.6 million or 18.2% over the prior year. Adjusted gross profit increased by 18.3% to $52.1 million, and adjusted EBITDA was $46.7 million, an increase of $5.7 million or 14% year-over-year. Payables and Treasury Solutions comprised nearly 63% of adjusted gross profit in Q3.

Guidance

• Revenue: Revised full year revenue guidance to $950 million to $965 million (8%-10% growth), down from prior $970 million to $990 million.
• Adjusted Gross Profit: Low end raised to $370 million, upper end remains $380 million.
• Adjusted EBITDA: Expected to range from $223 million to $228 million, slightly up from prior guidance. 2026 outlook includes high single-digit revenue growth and adjusted gross margins expanding 75-100 basis points.

Risks

• Macroeconomic Factors: Impacting Merchant Solutions performance due to pullback in consumer spend in certain verticals (restaurants, construction, wholesale trade).
• Residual Portfolio: Historical residual purchases have a slow-burning impact on revenue, with a year-over-year impact of ~$1 million as residuals run off.
• Partner Challenges: Potential challenges with partner strategic changes, though no significant immediate impact reported yet.

Question and Answer

Q: When did the same-store sales weakness in Merchant Solutions start?

A: Started in August and accelerated in September, with verticals like restaurants, construction, and wholesale trade being more impacted.

Q: What was the impact of residuals and specialized acquiring on Q3 results?

A: Combined, these had about a $2 million impact on Q3 revenue year-over-year, moderating from higher impacts in the first half of the year.

Q: What drives the acceleration in adjusted gross profit from Q3 to Q4?

A: Higher organic growth in Merchant Solutions, trends in October showing improvement, and full quarter impact from acquisitions like Dealer Merchant Services.