PRTH - NASDAQ

Good morning and welcome to the Priority Technology Holdings Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Chris Kettmann. Please go ahead.

Good morning and thank you for joining us. With me today are Tom Priore, Chairman and Chief Executive Officer of Priority Technology Holdings; and Tim O’Leary, Chief Financial Officer. Before we give our prepared remarks, I would like to remind all participants that our comment today will include forward-looking statements, which involve a number of risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. The company undertakes no obligation to update or revise the forward-looking statements whether as a result of new information, future events or otherwise. We provide a detailed discussion of the various risk factors in our SEC filings and we encourage you to review these filings. Additionally, we may refer to non-GAAP measures, including but not limited to EBITDA and adjusted EBITDA during the call. Reconciliations of our non-GAAP performance and liquidity measures to the appropriate GAAP measures can be found in our press release and SEC filings available in the investors section of our website. With that, I would like to turn the call over to our Chairman and CEO, Tom Priore.

Thank you, Tim. As we conclude our third quarter review, I want to take a moment to reflect on the execution of our vision for unified commerce and a multiyear planning in work that underpins our consistently strong performance. For those of you who have participated on these calls in the past few years and certainly, if you work at Priority, you've likely heard me share my belief that the decisions of the past are the architects of our present. I would like to offer a brief reminder of a handful of the decisions that we emphasize to investors. In 2020, amidst the height of the pandemic, we noted that, and I'm quoting, we have and will continue to target growth in countercyclical assets where businesses look for revenue in down markets and cash acceleration has more value. And we are managing our business several quarters ahead by building a platform to maintain stability and growth through varying business cycles. That is a one-stop shop for companies looking to monetize payments and acquiring and issuing without the headaches of managing payment operations, client service risk, underwriting and compliance. And again, following the acquisition of our Banking as a Service assets in 2021, we stated that '21 would be regarded as Priority's year of transformation, when we realize our emergence as a payments powerhouse with a meticulously curated platform to collect store and send money that would deliver differentiated products to our business channels. As the economic downturn unfolded in 2022, what we had anticipated and planned for became a reality. Our strategy to remain lean and position our innovative, agile technology to leverage the combination of traditional and countercyclical assets performed as expected, delivering nearly 29% top line and 45% bottom line growth. Our foresight allowed us to continue to accelerate our initiatives in new revenue channels that are early in the conversion to embedded finance and unified commerce solutions that positioned us to benefit from higher interest rates and the inflationary environment. Now, I highlight these decisions of the past because I would submit that first, it's time that Priority be recognized as an organization that operates with superior vision and is built to last. And second, we're delivering on the promise of unified commerce with clear and sustainable financial performance as evidenced in our quarterly results throughout tumultuous economic environments like the pandemic and today. And last, that we've invested thoughtfully in technology and build scalable operations and financial resources that will continue to outperform as market demands evolve. To simply put, regardless of investment disclaimers that say otherwise, past performance is a predictor of future results. In closing, I want to share a short anecdote that I believe is informative of the culture of Priority. We have a tradition each Monday for one of our now 990 team members to share a reflection, what we call a Monday morning motivation, and they share it with the entire company. Last week's submission came from one of our UI/UX designers, Jahanvi, that speaks to who we are as an organization. She shared, 'we honor the dream by doing the work.' Priority is on a mission to change how businesses of all types and sizes think about the movement of money and their expectations for cash acceleration, reconciliation and simplicity from their payment and banking partners. Our entire team is dedicated to our mission and honors our goals each day by doing the work. I want to say thank you to our dedicated team at Priority for delivering again this quarter and throughout 2023. And thank you to our investors and analysts for your ongoing support. Operator, we'd now like to open the call for questions.

[Operator Instructions] The first question is from Michael Perito of KBW.

Hey, guys. Thanks for having me on the call and taking my questions. I wanted to start -- so I was out in Las Vegas a couple of weeks ago for Money 20/20, and I felt like there was a lot of conversations around, kind of, margins and pricing in the payment space, B2B enterprises and merchant acquirer, you kind of name it. And I was just wondering maybe if you guys could provide some context around how the pricing dynamics in your business are trending? And how the unified commerce approach has maybe helped insulate you guys a little bit from some of the pressures that some of your peers are clearly seeing and speaking to?

Yes, sure. Michael, by the way, great question. And like this is the -- this is what unified commerce is designed to address, right? At the end of the day, customers of all sizes, whether you want to talk about the SMB market or looking upmarket, kind of more middle market, and even enterprise customers. There's a wallet share, if you will, right? And what we've been very successful at, I'll think about it if from a reseller's standpoint, what they're recognizing at Priority is that payments are about more than card acceptance. It's about -- certainly part of it, card acceptance or I'll call it, digital revenue acceptance, whether it's card ACH, right? But I want to redisposition that money to actually help my business grow. And Priority gives you all the tools to do that. Because when you get a -- while we're doing that AR work, it makes itself into -- makes its way into a routable FDIC insured bank account, where you could use that money quickly to pay vendors through a virtual card. Or you can use that using Plastiq with your existing credit to maybe capture early pay discounts, and pay vendors who won't accept card, but get a benefit nonetheless. Because you have a cashback card and you're generating an early pay discount and the funds can get resolved to your pay either way they want them. So those are the types of elements we're bringing into a seamless experience across our channels, that just make doing business with Priority, a better revenue proposition. Not just for the customer but also for our reselling channels that are the beneficiaries of; one, a more loyal customer, which is why our attrition is so low; and two, additional sources of really just earnings from services being provided. That's why when you look at the composition, and I think Tim alluded to this, of our gross profit, more than 50% of it now is coming from services unrelated to, I'll call it, transaction volume.

That's helpful. Yes. I mean it's an interesting time, and I think it's a good time to kind of have a different approach to growing and especially outside transactional volumes. I guess if we try to kind of bridge that to some of the financials, I know you guys aren't really yet providing a ton of color on '24. But based on the dynamics of what you're seeing today and particularly some of the good trends in enterprise and B2B, I mean, is the expectation still, I mean, is it fair for us still to be kind of thinking about double-digit top line and bottom line as we think about the -- maybe the intermediate term? Or would you guys qualify or change that at all?

Yes, I would say that, that is a fair expectation. If I were to offer an opinion on the current guidance that is in the market, I would say it's a very low-end reflection of the trend of the business. And one of the -- look our -- the mix of our business and the -- frankly, just the rapid adoption of our Passport Commerce platform by large enterprise partners. We would like to have a very keen appreciation and expectation of conversion before we, I'll say, offer the 2024 guidance. That's why we've been evaluating because it dramatically changes the picture. And we don't want to be inaccurate, it's really that simple.

Great. Perfect. Appreciate you guys -- Sorry, go ahead.

I would submit to you as well. Just on that topic, we're still early innings in taking that capability and pushing it into the SME vertical, right?

Right. So there's a lot of volume growth opportunity still you would say kind of regardless of where rates are.

Yes, yes. That's exactly right. The other thing I would just note about it, and the way we're positioned in that segment, we have a lot of assets that have come on to platform or call a lot of partners that have come on the platform that, let's just say, a decline in rates would indicate some probably economic softening, which would further increase adoption. So to your point --

So there are some levers to it. The rate benefit might not be as great, but it's not necessarily like a dollar-for-dollar drop, if that's the case.

That's right because you'll just see -- you'll see some more onboarding trends that would increase. And then like I said, we're still early innings in just the rollout of the other segments of the embedded financial tools and their capabilities. So which is -- look, just going back to your initial question about guidance, right? We want to get some adoption expectations and trends, which would give us better insight as to how we want to think about those metrics for 2024. But I'll just say, our current guidance is I'll say it's built for failure, not success.

Next question is from Harold Goetsch of B. Riley Securities.

Terrific. And then on SMB, thanks for the color on what it would have looked like, excluding the loss of the transition of the reseller. Is it safe to say we should think about this as being kind of a headwind through Q2 of next year? Is it where you first started feeling those effects that's the fairest way to saying or is there more volume to come off than [inaudible] at this point?

Our next question is from Brian Kinstlinger of Alliance Global Partners.

Great. Thanks so much for taking my questions. So you've been adding 12,000 merchants per month for the last two quarters from the 14,000 to 15,000 before the change of this reseller. As you look at the size and capabilities of your new resellers, I missed the number, maybe you could give it again that were added recently. Do you expect to get back to that 15,000 or above? And as you look at those new resellers, will you be staying in your lanes with, I mean, do they focus on the same verticals? Or are they bringing on some different verticals that you're not quite as experienced in? Or one -- or does it change the risk profile at all?

Sure. Let me just comment on a few things, and then maybe we can clarify the math a little bit. So first off, composition. These are actually -- they're just higher-margin resellers than let's say, related to the merchant migration that occurred with the current reseller. It's important to note as far as the -- what we'll say, the boarding trends which you referenced, those are actually quite similar. That hasn't really changed much. The net impact you're reflecting is a result of the migration of the reseller and those merchants, it's the net impact of the new merchants added, and the merchants that were migrated to their alternative platform. Does that make sense?

Yes. So what you're saying is merchants are leaving as opposed to you're not acquiring as many because of the reseller not bringing more to you. It's more of a migration issue?

Yes, exactly. So it's existing -- so you're --

The net number is lower.

Yes, exactly, exactly. So but the boarding trends each month are pretty stable with where they've been historically.

Okay. And then as you look at these, can you give the reseller number you added again? And do you expect that to accelerate the merchant count then from the 14,000 or 15,000 that you're probably at adjusted for that reseller?

You know, remains to be seen. We think there'll certainly be a modest impact upward. It's 116 that have been added year-to-date.

And that was 70 last year for the full year. Is that what you said?

70 for the full year. Yes. Yes.

Got it. Okay.

And look, I would submit to you, Brian, the more impactful thing, and the thing that we're focused on with our resellers is the recognition of -- because there's just more opportunity just within your existing merchant base, right? These opportunities to harvest that no one's providing these customers. They'll pay -- opportunities for vendor spend management where they can make incremental revenue, better optimize their working capital, use Priority's tool to accelerate their cash flow by using our Passport financial platform. What that actually does for people, Brian, to put a fine point on it, so you can appreciate this at kind of a more genetic level. Customers that are on our gateway, have their funds reflected in their Passport account in five minutes or less. If you're not a gateway, but a processing customer, you're getting that within the same day, typically 12 hours. Now, think about that if you're running a restaurant on the weekend, more often, if you're on a weekend, like in a traditional setting, you're not seeing that money for two to three days, right? Because the bank is not open on the weekend. But Priority is. So we're able to give people access to their money and ways to use it to pay vendors and negotiate better terms that are really meaningful, particularly in this economic environment. And that's where we're going. Like I said, we call it unified commerce experience. That's what customers expect now. And you add to that the ability to take that money and push it out to a salon worker on a Passport account, or push the tips out to your servers on a Passport account, and now they can go out and spend and generate additional kind of interchange revenue that comes to everyone in that ecosystem. It's just a different model. And it's a fintech model. It's not a merchant acquirer model. And that's a big part of the message we're trying to get people to recognize. It's a different machine, to Hal's earlier question, it's why we synergize things like Plastiq exceedingly well, exceedingly quickly. We're built to optimize the performance of software and payment assets. And the results speak for themselves. We can point you to other examples, but we do it well because we're very intentional about it. And this company, if I could say it is purely is this, it's like we just have something prove. And everyone in here thinks that way.

The next question is from Natasha Otton of DGA.

Hi, good morning. You mentioned that the gross margin decline in the B2B segment was related to the addition of Plastiq, and how they need to report their financials differently from a GAAP standpoint compared to the rest of the B2B business. Could you please explain that further and why it's treated differently?

Yes, I started to explain that last quarter as we acquired Plastiq and some of the different GAAP requirements, but I've got the benefit of sitting here next to Rajiv Kumar, who's our Chief Accounting Officer, who does a fantastic job for us. So I'm going to let him try to answer that a little bit better this quarter, and see if we can dispel some of the other concerns out there in the market on that, those gross margins.

That's correct.

This concludes our question-and-answer session. I would like to turn the conference back over to Tom Priore for closing remarks.

All right. Well, I hope everyone has an excellent weekend. I want to just thank everyone for taking the time to follow our story, learn more about where we're headed as a business. We look forward to continuing to deliver for our investors. And rest assured, we've got a very dedicated team that hopefully, it's starting to be very clear to folks, are laser-focused on performing. So thank you, everyone. Have a great afternoon and a terrific weekend. And given we're not going to speak to everyone for a while. Fantastic Thanksgiving and holidays.