Good morning and welcome to the Priority Technology Holdings Fourth Quarter and Full Year 2022 Earnings Conference Call. All participants will be in listen-only mode. [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 comments 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, Chris and thanks to everyone for joining us for our fourth quarter and full year 2022 earnings call. Before going into our financial results, I would like to highlight a few key takeaways about the current business trends as you absorb the Q4 performance and projected into 2023. First and foremost, the business is performing the way we anticipated, consistently growing market share in SMB acquiring and producing strengthening results in B2B and Enterprise Payments. While other companies are paring back in response to uncertain macroeconomic conditions and the recent banking turmoil, we're driving forward on the strength of our countercyclical business lines that we're positioned to benefit from higher interest rates and the current economic environment. Second, not only are we outperforming our peers but the key metrics in our business have continued to improve. Our full year 2022 growth rates and margin expansion are representative of the first quarter trends we have seen to date in 2023. Last, our decision in 2022 to accelerate investment in Passport, our unified commerce API combining full featured payments and banking as a service is proving somewhat prescient. Given the recent struggle of the banking sector and the general prices of confidence in banks among businesses of all sizes. I'll speak in more detail on this topic toward the conclusion of our call but suffice to say that the current pace of new partners adoption of Passport to collect, store and send money will fuel results in the quarters and years ahead. With that as a backdrop, let's dig into the numbers. As you saw in our earnings release, we continued our positive momentum with an exceptionally strong fourth quarter to close out a strong 2022. Our fourth quarter revenue increased 23% from the prior year to a record $177.6…

Thank you, Tom and good morning, everyone. As I review the full year and fourth quarter financial results, including the segment level contribution to the consolidated results, please refer to the supplemental slides or the MD&A for further details. Our MD&A is included in the Form 10-K that was filed with the SEC this morning and provide a discussion of our comparative full year results. A link to that filing can also be found on our website. As Tom mentioned, we had strong financial performance across all business segments in both the fourth quarter and for the full year. I won't reiterate the financial highlights that Tom already spoke to for both of those time periods. But before I go into the segment level details, I do want to provide a few other key metrics as it relates to the full year consolidated results. For the full year, we had almost 15% growth in bankcard dollar volume across all segments to roughly $62 billion. We had 10.5% growth in bankcard transaction count to 640 million transactions and just under 4% growth in average ticket size to $96.50. If you include ACH, debit and other volumes, the total payment volume for the year was $112.8 billion. Again, those metrics are all for the consolidated business. I'll now go into more detail on each of the business segments results for the fourth quarter. Let's start with SMB payments on Slide 10. For the fourth quarter, that segment had revenue of approximately $150 million which was an increase of 23% over the prior year's fourth quarter. This strong growth was almost entirely organic and was driven by a combination of over 7% growth in bankcard dollar volume to roughly $14.9 billion which included 9% growth in bank card transaction count and was slightly…

Thank you, Tim. Before wrapping up, I'd like to speak to one of the more significant points we made during our Q3 discussion. During it, we called out our decision to accelerate investment in our banking product initiatives in the back half of 2022, that would lead to slightly lower bottom line guidance, stating that, we believe accelerating feature development of our native Priority Passport offering to deliver a full suite of proprietary payment and banking solutions into the SMB and B2B markets as well as enterprise partners will result in outside benefit to our shareholders in the coming years. We also highlighted research from leading research firms, McKinsey and Bain about the trends in payments and banking commonly referred to as embedded finance. Their conclusions reflected that small businesses starting up today may never interact with a conventional bank. By logging into their e-commerce or accounting platform, they can open a deposit account, order a debit card and meet most of their financing needs to embed financial products into a single, seamless, convenient and easy-to-use customer experience. They predict that the winners will likely provide a full suite of services, including some regulatory oversight, compliance, origination and fulfillment, enablers that take the hassle out of embedded finance for platforms through easy integration and great servicing should hold the upper hand. They can choose high-volume self-service model or a higher touch operation across fewer bigger platforms. Well, the current crisis of confidence in the banking system will certainly drive more businesses to alternative solutions that offer greater transparency, speed of cash flow recognition, regulatory support and diversification of banking system risk that traditional platforms cannot deliver. Our systems are built for this future and are proving ready for the current test under fire. In addition to handling all forms of…

[Operator Instructions] The first question is from Brian Kinstlinger of Alliance Global Partners.

Thanks for all the details on unified primers platform. I believe that's what I've been calling the banking-as-a-service platform. So assuming that's right, can we talk about as this product launched, you talked about it was imminent as of last quarter. How is early adoption going outside the initial beta customer? And then what's the customer acquisition process for this new platform offering?

Yes, sure, Brian. I mean, look, so far, it's been all smooth. We're being very judicious about how we're rolling it out. It's been more focused on our enterprise and B2B customers initially and we'll be hitting the SMB segment. We've already launched beta into SMB, gathering more intel and focused on having that launched more fully on the latter part of May and June into just a broad base into the SMB acquiring segment. The -- it's been a really good test quite honestly, because of the recent turmoil in the banking sector. So -- just to give you a couple of examples, kind of stated there, we -- we had a lot of folks who were just needed to get account set up and move funds out of SEB or signature. And they were average setup time for them to get established, do all KYC, AML checks, get them permission with credentials with 7 minutes. So it's pretty -- I don't know how many platforms are equipped to operate at that level. We had folks that chose instead of, let's say, setting up physical accounts through our portal would do it through the API. And we're integrating to our API for all of their payment operations. And these were multibillion-dollar players in 48 hours. They were set up and testing transactions and moving volume. So it's ready for prime time. It is -- got a robust pipeline of enterprise partners either integrated or already -- or in the process of integrating and it's a fast process.

As it relates to those banks signature and SBB that had challenges and you had companies that were able to set up in 7 minutes. Were those customers that were already familiar and working in your backlog? Or how do they become familiar with to move so quickly?

I mean they -- they were relationships that were familiar to us, we're familiar with what we're doing but they were not existing customers.

Got it. And then switching gears to CPX. I think you were clear that you expect growth this year and you could have had 9% growth. But at least from how I personally expected, I thought it would be growing faster over the years. Maybe talk about what's going on there in terms of onboarding business payments volume, what, if any, is the bottleneck? And how should investors think about this and when it might become a much larger scale?

Sure. Look, the -- we saw a very good wallet share growth or if you think of like growth in existing logos during the last couple of years. So sales that had been made, folks had been on the platform, did more volume which was great and anticipated where we've seen slower sales cycle is harvesting some of the relationships that we've already set up, Premier Healthcare, for instance and their GPO. The -- some of our FIs that we have contracted and are converting portfolios. Those implementation and sales cycles have been longer than certainly, we're satisfied with. And that's not -- it's not due to technology so much is due to -- we've got to break through some of the inertia at the customer level. And then, look, the other thing we've done is we just brought in 3 new salespeople. So we've been expanding sales and we felt we needed to put some -- a few more technological components in place so that salespeople could be highly effective. We did that, as I think we noted, not the least of which is the banking-as-a-service component, right? I mean think about the experience of a buyer and your supplier network and you can permission supplier wallets or I'll call it, supplier accounts on Passport instantly, right? Take all your supplier information, upload them into our system, take all the information they have on their W9 and run AML and KYC checks in minutes, right? That's a vastly different experience going out to sell than I'll call it, the old school way of gathering that information supplier by supplier. So we waited to have that complete to expand sales. We've now done that and we're very optimistic about the success of those selling efforts with this platform being available broadly and B2B.

Great. Just quickly on merchant acquiring, I think I heard the comment but just to be clear, to date, in the first quarter, the trends you have seen in the last 2 to 3 years or even longer of merchant acquiring are generally unchanged. Is that right? Tim O’Leary: That's correct. Now we've seen strong volumes through the first 2 full months of the quarter and expect that to continue through the balance here.

And as you become much larger, it might take more merchants to sustain the growth. Are you making investments on the sales side? What do you do to eventually have to accelerate the number of merchant acquirers -- merchants you're acquiring?

Well, a couple of things that are going to influence that segment and the revenue in that segment, right? So let's just, first of all, talk about the merchant base we have. We'll start rolling out embedded finance/banking into this segment, right? We don't need to invest any money to roll that out. These are all things that are built. They're set to go. Every single merchant that's on our platform will have a Passport account, call it within the next month to 6 weeks. So our revenue account will be there. Now it just needs to be activated, okay? As it gets activated, we'll offer them the ability to receive funds instantly, what we call fund in 5. If you're processing on our gateway, as soon as you authorize transactions and you elect to have instant funding, you get your money in 5 minutes of authorization through the gateway. If you're not a gateway customer but you're on our MX merchant suite, you'll get money same day when you close your batch. And if you leave that money in your Passport account and you spend from there using a debit card, there's no costs. If you sweep it to an external account, there'll be a fee, right? So these are things that they're -- look, they're what businesses need. And in this -- particularly in this environment, they want cash acceleration. They want transparency. And I would submit to you, given the current banking environment, having modern reporting that's clear and transparent which we have is going to be, we think, a pretty high value add, particularly sense that money is in an FDIC insured ratable account. So that's just one example. And of course, we'll keep building on from there, the ability to borrow funds from approved lenders…

Okay.

I mean that is what's happening right now, Brian.

Right. Two numbers questions. You highlighted salary and benefits up 41%, obviously, faster than revenue growth. Do I assume from the adjusted EBITDA guidance that, that trend will change and your salary and benefits expenses will grow slower than revenue growth? And then unrelated with the rising interest rates, can you help us with kind of what you expect interest expense to be for 2023? Tim O’Leary: Sure. Yes. So Brian, on the salary and benefit side. So as I mentioned on the call, we're going to continue to monitor and really manage the investments we've already made to date, right? So no different than the sequential growth you saw from Q4 over Q3, right? That was pretty modest, only about $500,000 of an increase. We're going to continue to really keep those salary and benefit levels where they finished out the year. So I think you'll see growth there at a much lower rate than the top line as we want more and more of that growth to slow down to the bottom line. So I think your view is accurate. Obviously, we didn't provide detailed projections on that as part of the guidance but you can see the margin expansion that's happening between EBITDA growth.

On the interest expense? Tim O’Leary: Yes. So on the interest expense, obviously, our debt today is all floating rates. So we've got the natural hedge as I mentioned. But from an interest expense on the debt itself, depending on where the Fed tops out this year and where LIBOR or SOFR finishes off. I think we're estimating somewhere in the low to mid-$60 million of interest expense for the year. Obviously, some of that is offset in large part by the deposit balance, right? So with the rising rates, we've gotten the benefit of interest income off of the float, right? We've got roughly $530 million or so of deposits that sit out there at the end of the year. That number has grown since then. But that offsets a lot of that interest expense from a hedge standpoint and if you think about each 0.25 point of increase in rates, that's about $350,000 per quarter of additional interest income, right? So obviously, we saw a big bump late in the year last year and given where rates are today, we should see a meaningful increase year-over-year in interest income.

[Operator Instructions] The next question comes from Matthew Howlett with B. Riley.

Just what the margin guidance, I mean, did you say it contemplates the Enterprise Payment [ph] was in the fourth quarter, about 90%. If so, I mean, what -- I know I'm not trying to get '24 guidance out of you. But why wouldn't that margin as that kicks in, continue to just accelerate. It's just sort of what -- company-wise, something where you can give us sort of what's -- is '23 sort of a transitional year. Are you holding back some upside with some rollout. Just get in to more of that margin guidance and the enterprise part of the segment. Tim O’Leary: Yes. No, happy to, Matt. I appreciate you joining the call. So I think there's a couple factors there that work against each other, right? So obviously, enterprise will continue to grow. We expect those margins to stay pretty consistent with where they finished out the year, I think that business had a lot of growth in the second half of last year compared to the first half of the year as a lot of the government stimulus monies were depleted from consumers' accounts and they had to go into debt settlement processes that really expanded part of that effort. So, I think the growth there really accelerated in the second half of the year. So I think you'll see some of that growth continue into 2023 but not maybe at the same rate you saw from first half to second half of last year. And then offsetting that is some of the margin compression, we continue to expect within the SMB portfolio, right? So as the larger reseller partners continue to grow faster than the balance of the portfolio, you'll see some of that compression there given they extract higher residuals. So those 2 offset. And then obviously, B2B Managed Services rolling off is a gross profit dollar impact but should help the margins in that business, albeit on a smaller dollar amount in that segment in '23.

I appreciate that. Maybe I'll ask other one, where do you see the long-term margins of the company when you get really ramped with the banking-as-a-service product, the enterprise more merchants adopt it. What's -- how do investors look at it? It sounds like the 30 -- high 30-plus percent is going to be held back a bit because of the SMB side of it. But looking longer term, is there any reason not to think that margin could be 40%, 50%?

Yes. Look, we're taking a judicious approach and your -- kind of from your mouth to God's ears, if you will, because we'll have better clarity on the impact as we see the adoption within those 2 segments. But to your observation, right, that all just flows to the bottom line. So if we're making, call it, an extra $10, $15 per month, per merchant because they're using banking services where funds are making it to their Passport account and their spending on a debit card that generates interchange that we're collecting as the issuer, right? That's going to change the dynamic of the profitability per merchant. So we think there's a lot of inherent operating leverage in the business. We've got the products to deliver on it. Now, we have to drive adoption. And as that occurs, we'll have a better, very analytically driven answer to your question because it will -- we'll have metrics. It will move beyond, I'll say, a theoretical evaluation at this point. So that's why we're trying to be a bit judicious about representing what it is at this time.

I appreciate that. Just -- you sort of confirm that margins look like they just explode at some point when the Enterprise Payment really kicks in. And it sounds like you're holding back a little bit with the guidance here in '23 and maybe investors should be looking at '24 instead but certainly impressive potential there. And then -- is there an update on CFTPay? I'm sorry if I missed it, in terms of how people are on and would you look at signing up new card companies [indiscernible]. I'm just any update on the CFTPay and where that's going?

Sure. So look, it's -- I'll put it in relative terms. If you were to look at trends within, I'll call it, consumer wellness prior -- or let's say, at the outset of COVID. The boarding trends of consumers electing to move into a consumer wellness program basically help them consolidate that, help them negotiate resolutions to debt. It's doubled, since call it, a year ago. I don't know that -- and that's to Tim's comment, like, do we think it doubles again this year? Probably not. There's incremental upside for sure. But it's a pretty healthy rate. And look, just being very candid about the segment, we are very considerate of who sits on our platform because, unlike others that operate in the space, we are a licensed money transmitter which is a benefit but we want to be considerate of who we have on the platform. And there are certain participants in the space that they're just not -- they're not potential customers for us because of their distribution models. So, I think you'll see modest but some kind of logo growth but what we have seen is by picking the right integrated partners in that segment who are leveraging our banking-as-a-service technology. They tend to be the winners over time. So we see the growth from those partners.

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, wanted to say thank you to everyone for taking the time to join the call, your ongoing support to Priority. And just to reinforce that we are built for these times and we're very excited about what the future holds, particularly given some of the dislocation that we're seeing in not just aspects of the economy that we think we can be a better solution provider to businesses in need but also the growing opportunity that the transitional nature of the banking industry that we're going to see probably in the next year that we can capitalize on. It's why we built a platform we did and now we want to put it to work. So thank you to everyone and thanks to all the Priority colleagues listening. Let's go get the job done. Take care, everybody.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.