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, Chris and thanks everyone for joining us for our third quarter 2023 earnings call. I'd like to start today by discussing some of the trends we're currently seeing in the business. And then provide an update on important developments at Priority, including the successful integration process of our August acquisition of Plastiq. Consistent with what we saw in the first half of the year, during the third quarter, we continued to execute in all 3 segments of our business. Delivering strong results in SMB acquiring, B2B and Enterprise Payments. We remain committed to our unified commerce vision of combining payments and banking on a single platform, accelerated by the strength of our diverse business lines that were positioned to benefit from higher interest rates and the current macroeconomic environment. Total accounts operating on our commerce platform now exceed 820,000, processing over $118 billion in transaction volume on a last 12-month basis while administrating in excess of $850 million in average daily deposits. We're excited about our 2023 progress to-date, and working hard to close out the year strongly and position ourselves to accelerate in 2024. As you saw on our announcement earlier today, we maintained our positive momentum with strong financial results in the third quarter. Our Q3 revenue of $189 million increased 14% from the prior year, this led to a 23.6% increase in adjusted gross profit to $72.3 million, and a 28% improvement in adjusted EBITDA to $45 million. Adjusted gross profit margin of 38.3% increased 310 basis points from the prior year quarter, highlighting the strong operating leverage of our purpose-built platform. On a year-to-date basis, revenue increased 14.4% to $556.3 million, leading to a 22% gain in adjusted gross profit to $202.4 million. Now combined with a 230 basis point increase in adjusted gross…

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…

[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.

Yes. No, that's helpful context on both sides. So I appreciate that. And then just lastly for me, maybe for Tim. The enterprise segment, can you maybe give us a little bit more inside baseball on how -- I mean who knows what the macro is going to do in '24, but presumably, I mean, rights has been beneficial for this business. Can you maybe provide a little context about what some of the puts and takes are around rates on the enterprise revenue trajectory, both kind of just on an absolute basis, but also on the margins? Tim O’Leary: Sure, happy to. So obviously, the rate components where we earn interest income on the deposit balances in that business, that flows through effectively 100% margins, right? It's a straight flow through. So that revenue in total interest income across the franchise for the quarter was just under $10 million. Roughly $6 million of that was attributable to the enterprise segment, right? So if you took the balance of the revenue in Enterprise, a lot of that still flows through at very high margins as well, right? To Tom's point, you have a high percentage of that revenue is monthly recurring revenue that's not volume or transaction dependent. So it is highly recurring, highly valuable revenue stream that now is just north of 50% of our gross profit. So I think while we've got some weight to the interest income, I think we're pretty balanced with the other types of fee income we're generating across the business.

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.

Hey. Good morning, guys. This is a really good quarter and interesting commentary. I'd like to peel back on Plastiq. It really seems to have been a huge benefit to the B2B segment, and you guys broke even because Plastiq was a company went bankrupt, so you quickly got in this whole segment to basically breakeven. I want to know what are the things you guys did to make that happen? Tim O’Leary: Sure. It's Tim. I'll jump in on that. So I think as we indicated last quarter, we expected to get that business to cash flow, profitability and EBITDA profitability in the first quarter of 2024. I would submit that we're running ahead of that pace given some of the actions we've taken and a lot of it is the ability to bring companies like Plastiq and others into the broader Priority franchise, and we use the term operationalize some of the business and find efficiencies across the infrastructure and the team we have in place. So we've been able to do that, really reduced a lot of the operating costs in that business. So far, we haven't really ramped up the marketing spend and the go-to-market for that business yet. So there might be a little bit of increase in cost in the business in Q4, but nominally so. But I think we're very pleased with the efforts so far from a cost standpoint. And then on the revenue side of the equation, there's still a lot of levers to be pulled, right? We haven't fully pulled all the levers that we expect to in that business to really drive the top line growth. But even what I would call somewhat baseline revenues that we had in Q3, we got that business to effectively almost breakeven EBITDA.

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?

A couple of things, just to clarify. We didn't lose the reseller. They remain a reseller. And they're -- I would submit their boarding trends have certainly stabilized to increase. They were going through a diversification, which, by the way, and I mentioned this previously, we wouldn't -- couldn't blame them for it. It was -- given their evolution, it made some sense. That being said, what we have seen is a considerable increase of adoption of our reseller community. We've already signed 116 new resellers on this year through the first nine months. That would compare with a full year last year of 70. So again, coming back to this collect -- what I'll call is now collect store borrow and send capability, that our resellers benefit from with Priority. The adoption has been very, very strong with folks just recognizing your portfolio is worth more at Priority. It's just a fact because there's more ways to help your customers and generate fees of things they're doing every day, less efficiently with other parties, like pay their bills, store their money, borrow money, maximize our working capital, those types of things. So we're actually on our newer agreements, we're just seeing the benefit of better margins. Tim O’Leary: And Hal, just adding on to that, just to your question on the impact for the next couple of quarters. I think if that business continues at its current rate, we'll definitely see some headwinds in Q4 and into Q1 of next year. That will moderate certainly into Q2 of next year. But I think the profitability impact of that, as I've mentioned in our prepared remarks, is somewhat limited. So I think it was more of a revenue impact. Obviously, you've seen us increase EBITDA guidance. So we're reflecting the impact of both of those in our guidance for the year.

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.

Thanks, Tim. so Plastiq, the business model is that they are merchant of the records in the transactions where they're accepting payments. So they collect the gross fee as a principle and then they pay interchange as like all card networks or their service providers. And that is why GAAP requires in that scenario that revenue should be recognized on gross and all the interchange payments should be recognized as cost of services. Whereas, if you compare that against our merchant acquiring business, there, we collect fee from the customers of merchant on record, and then we settle them on their behalf. And therefore, they are not our fees, they're not -- the interchange is not our expense and therefore, we have to do that, netting that we do. So hopefully, that answers the question. The real difference is that Plastiq is a merchant of record in all the transactions that they are processing, and therefore, we are required to record those revenue at the gross basis. Tim O’Leary: The net effect there is that the margins for the Plastiq business look lower, but on a transaction basis, the revenue as we would think about it, maybe apples-to-apples to other parts of our business. Gross profit more approximates the revenue of Plastiq if it was looked at the same way as the rest of our business.

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.

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