Good morning and welcome to the Priority Technology Holdings' Fourth Quarter and 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. 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 giving 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 Web site. 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 for joining us for our fourth quarter and full-year 2023 earnings call. I'd like to start today by discussing the continued positive trends we're currently seeing in the business, as well as several important developments at Priority, including the successful integration process of our August acquisition of Plastiq. As a result of these trends and developments, we're excited to report the strongest results in our history, and we are well-positioned to perform even better in 2024, and beyond. Consistent with what we saw through the first nine months of the year, during the fourth quarter, we delivered strong results in SMB acquiring, B2B payables, and enterprise payments. We remain convinced in the potential of our Unified Commerce vision, combining payments and banking functionality on a single platform, accelerated by the strength of our diverse business line, now we're positioned to benefit from higher interest rates, and to perform in a variety of macroeconomic environments, including the one we're experiencing today. Total customer accounts operating on our commerce platform now exceed 860,000. As we processed approximately $120 billion in transaction volume during 2023, while administering $900 million in deposits at the end of 2023. Looking at our financials, we maintained our positive momentum with strong results in the fourth quarter. Our Q4 revenue of $199.3 million, increased over 12% from the prior year. This led to a 20% increase in adjusted gross profit of $72.9 million, and a 12% improvement in adjusted EBITDA to $44.6 million. Adjusted gross profit margin of 36.6% increased 230 basis points from the prior year quarter, highlighting the strong operating leverage of our purpose-built platform. For the full-year 2023, revenue increased 14% to $755.6 million, leading to a 21% gain in adjusted gross profit to $275.3 million.…

Thank you, Tom, and good morning, everyone. As I review the 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 provides a discussion of our comparative fourth quarter and full-year results. A link to that filing can also be found on our website. As Tom mentioned, we had strong financial performance across the business in the fourth quarter and for the full-year. I won't repeat the highlights already referenced. But before I go into segment level results for the fourth quarter, I do want to mention a few other key metrics as it relates to some of the discussion we had on our Q3 earnings call. For the full-year, adjusted gross profit from our B2B and Enterprise segments represented over 50% of total, while for the fourth quarter, that same figure was 57% as we continue to experience higher growth in our higher margin operating segments. Recall that Q3 was the first quarter where the combined profitability of B2B and Enterprise exceeded SMB. In addition, the highly visible and recurring nature of our business model continues to gain momentum as over 58% of adjusted gross profit in Q4 came from monthly fees or revenues that are not dependent on transactions or Bankcard volume. Moving now to the segment level results and starting with the SMB segment on slide eight, SMB generated Q4 revenue of $139.9 million, which is $9.9 million or 7% lower than the prior year's fourth quarter. As discussed on prior calls, a large reseller partner started to diversify their activity, and we expected that diversification strategy to continue throughout 2023. If you look at the year-over-year impact of that shift on the Q4 results, it was…

Thank you, Tim. Before wrapping up, I'd like to take a minute to discuss where priority is in our journey. Everything we've done over the past several years, from the significant early investment in our technology infrastructure, to our focus on diversifying our offering with countercyclical assets, to our acquisition of Plastiq, was done with intention and purpose to provide our customers with an elegant, unified commerce experience, combining our pillars in acquiring payables and banking on a single platform. Our results are demonstrating that we're achieving that goal. Priority has made the turn to delivering tech-enabled services that accelerate cash flow and optimize working capital through a powerful commerce platform to collect, store, lend and send money, allowing us to approach the marketplace in acquiring payables and banking solutions in a very unique way. The success of our offering is evident not only in our growth numbers and margins, but also when talking to our customers and partners. While we are outperforming our peers in today's market, most importantly, the clear advantage we've created through our unique capabilities and style of engagement provides a long-term runway with enormous upside. Let me share one of the ways we've separated ourselves. On slide six, we've included a link to a video highlighting priorities, half-court product for the SMB and ISV acquiring channel. I highly encourage you to watch the two-minute video when you have a chance, as it showcases how our Commerce API can embed cutting-edge finance applications that optimize our customers' cash flow, streamline transaction reconciliation, and optimize working capital. Through Passport's link to our MX Merchant acquiring tools, customers can have access to their funds in minutes of their batch closures, even on weekends and holidays. They can access bill payment tools that earn them cash back as they…

Thank you. We will begin the question-and-answer session. [Operator Instructions] And the first question will come from Jacob Stephan with Lake Street Capital Markets. Please go ahead.

Hey, guys, thanks for taking my questions. I know you kind of touched on the reseller diversification concluding, here in Q4. But maybe you could just walk us through how you're thinking about vertical within the SMB that you're primarily targeting here?

Yes, I'll just -- I don't think it's going to be really a departure from what we've done historically. We've got a very diverse group of resellers that some of whom are, I'll call them, horizontal sales networks. Others are more vertically based, so some in professional services or in wholesale trade or those in of all recurring billing. So, some of them have unique areas of expertise, and they really blend together in a framework that you see across our portfolio, that we don't expect that mix to meaningfully change. I'll tell you, there are some areas where we're adding renewed dedication that we think will increase proportionally over time. They really mesh with some of our ISV investments. The construction space most certainly. We built some unique tools that we'll be rolling out across our distribution in the second quarter. Healthcare is another that we'll proportionally seek to increase. Say, if there's a dynamic, in particular, really driving the future of acquiring is it'll be less so segment-driven, and more so the implementation of, you could think of it as, adjacent or bundled services to get a chance to, for instance, just watch that video. It's picking up all of the other areas of expense that small businesses have that they're frustrated with. They're frustrated with their bank, they're frustrated with the way they pay bills and the way cash flow moves through their business. So, we think providing tailored or curated point of sale on the front end, and banking and payables products that work seamlessly with that experience, that's the focal point at this point. And we have very high expectations of that strategy. And the beautiful thing, I think, is the way we've built it. Our ability to deploy it does not come at any incremental cost. So, it's very high margin to our performance.

Okay, got it, that's helpful. And then maybe just last one for me here, the restructuring charges on the healthcare payments business that you referenced. Do you expect any lingering impacts in Q1? Any elevated non-cash charges as we look at our models?

No, we don't expect any lingering charges there. We went ahead and took the restructuring charge in the fourth quarter. And it won't have much of an impact on the numbers either going forward. It's already been baked into our guidance.

Okay, got it. Thanks. I'll turn it over.

The next question will come from Tim Switzer with KBW. Please go ahead.

Hey, good morning. Thanks for taking my question. I appreciate all the color on the guide, and you guys touched on it real quickly. For the expense outlook, could you guys talk about where you expect expenses to trend over the course of 2024? And then, particularly, the cost of revenue trends, and how you guys would like to direct your investments going forward, next year?

Sure, yes, I think from a overall guide standpoint on the expenses, as you could tell, sequentially, going from Q3 to Q4, we continue to maintain good discipline on the salary and benefits side, and really try to gain efficiencies across the business as we think about the grow-over from what we had in '22, where we did invest a lot in the business from a personnel and technology standpoint. So, I think you'll continue to see that discipline deployed throughout the balance of 2024. Within the various segments, I think our faster-growing parts of SMB are the larger resellers. So, I think we'll continue to see some compression there in the core gross margins, but as Tom mentioning a second ago; a lot of the ancillary products we can sell into that SMB customer base are going to margin-enhancing events. So, I think we're optimistic that we'll be able to hold and expand margins in SMB overall, despite some of the natural headwinds you have there as the larger resellers grow faster. And then in enterprise and B2B, we'll continue to see margin expansion or lest consistency, right? I think you'll see some potential flattening in enterprises, given where it's already operating, at 94%-plus gross margins. And then within B2B, as we continue to see Plastiq expand, right? Obviously -- we only had five months of revenue in 2023 from Plastiq. As we get a full-year effect in '24, that may put some overall pressure on gross margins in B2B, but that's really just because of the accounting treatments. That business is performing well, it's ahead of expectations, from originally how we made the acquisition, and we're optimistic that that will continue in '24.

Great, yes, that's helpful. And for the rest of the guidance that you guys gave, could you talk about the different factors, whether it's macro or customer trends that could maybe drive upside or downside from the high end and low end of the guidance?

So, I'd say -- look, first off, the macro environment will always have some influence. We've -- I think we would submit that we've been very thoughtful in the way we've constructed the diversification of our business lines where, there'll be instances in a downward economic environment where you'll see the consumer slow down, which is a natural headwind to payment processing and acquiring. Historically, we have offsets to that on the enterprise side that do very, very well when consumers need assistance with debt resolution or, I'll call it, consumer wellness strategies that benefit many of the areas that we operate. The other thing, of course, is B2B tends to do well when interest rates are higher and there is a focus on new sources of revenue in business as economy slow because it does provide a unique source of revenue for more efficient supply chain management and working capital optimization. So, having tools that bring those to bear with customers as they're ready to adopt has accrued to our benefit. So, we feel really good about the -- I'll call it the cyclicality that could present. Look, the biggest opportunity we have and we've been very, very modest in our assumptions is really the adoption of banking and payables as an adjacency to our customers who are using us for acquiring and other really other kind of, I'll call it vertical solutions, right? They're being now exposed to a tool set that gives them simplicity to do things that they want to do every day in their business, but their current solutions don't provide them. A good example is let's take two quick examples, and this is why we send that video out so you could see it. As they say, a picture is worth a 1,000 words.…

That's awesome. Really appreciate all the detail. Thank you, guys.

Yes, thank you for the question.

Your next question will come from Brian Kinstlinger with Alliance Global Partners. Please go ahead.

Hey, great. Good morning. Thanks for taking my questions. I wanted to discuss the balance sheet and start there. Despite the cash flow, the net debts increased. Can you talk about capital deployment plans in 2024? And related to this, in the past, you made some strategic divestitures where it made sense that would create shareholder value. Do you see any of these opportunities? And I'm only throwing it out there, it's probably not it. But CPX, it's about 1% revenue contribution, although it fits well in your flywheel of money movement. There's been some great valuations in M&A. I'm just kind of curious high level about some of those things.

Hey, Brian. It's Tim. Thanks for the question. Yes, looking at the balance sheet, obviously the debt from a gross standpoint did increase from Q3 to Q4. That was largely driven by the Plastiq acquisition. We had financed that acquisition under the revolver. And then, as the broader debt markets improved, we went to the term loan market, upsized our existing term loan, and paid off the revolver. Given some of the demand, we actually upsized the term loan and put a little cash on the balance sheet. So, from a net debt standpoint, it was neutral. So, it was a leverage-neutral transaction if you think about it that way. So, the net debt at $614 million, we continue to de-lever from a multiple standpoint as EBITDA grows. So, we finished the quarter with 3.6 times net leverage on the senior debt. If you include the preferred equity, it would be at 5.2. But those numbers continue to come down. And if you think about the balance of the year, even if you don't assume a debt pay down, which obviously is not our assumption, but even if you don't assume a debt pay down, you just look at the EBITDA guidance we have out there, you'll have another half turn deleveraging throughout the year just from growth in cashflow in the business at the EBITDA level. So, I think we're optimistic about the balance sheets and our ability to manage that. We're constantly thinking about capital deployment and whether it's acquisitions versus debt pay down versus other investments we can make to drive further revenue growth and margin enhancements and overall increase shareholder value. So, that's a constant conversation we have as well as looking at the portfolio of assets we have. You've seen us do that in the past. I'm not going to front-run anything that we may or may not have in the works, but we've always looked at the portfolio and thought about value creation and thinking about how can we best monetize assets and drive shareholder value, and that won't stop.

And Brian, if I can add a thought on that, just, and I appreciate kind of the perspective on it. In some regard, in fact, I would submit to you, given the stock that's clearly undervalued relative to our peers, our growth rate is substantially higher, our multiple is much lower, reconciling, utilizing equity for some of these acquisitions, it's hard to justify that that's actually going to create shareholder value, particularly when you look at how quickly we get assets performing. And take Plastiq as a good example. It's a business when we acquired it, it was losing, conservatively, it was burning $20 million of cash. That business in our hands is cash flow positive. It is on a phenomenal trajectory. So, at the appropriate time, when we feel like we've maximized its value within our platform or even other things we have, will we find other partnerships? Will we consider other ways to monetize our portfolio of assets? Certainly. Knowing that, in doing it the way we have, we will have created outsized returns for shareholders, but it's going to take the work of getting assets that were non-performing, performing, which we've proven we're very good at, and then optimizing those at the right time when it's going to benefit the long-term shareholder value. And so, just to kind of reiterate, that is a focal point. And in some of the current circumstances while it increases the quantum of debt, we're doing it responsibly where we're actually deleveraging in the process. So, the value creation is pretty obvious.

Yes, no, look, I mean, my answer to that would only be creating good returns on acquisitions and growing EBITDA hasn't generated value because of the balance sheet overhang. And so, I would just submit that, that has to do with the cheaper valuations, if anything more. But anyways, the EBITDA conversion to free cash flow in the last two years has been about 36%. Is there an opportunity to grow that or is that a good proxy for how we should think about cash flow compared to EBITDA?

Yes, I think we always look at ways to expand that, right, whether it's being more efficient with the balance sheet and thinking about opportunities to lower our cost of capital as markets improve around us. And I think we have seen the capital markets improve, so we're evaluating those opportunities from a cost of capital standpoint. We also think about the acquisitions that we look at in the pipeline and the ability to deploy capital more efficiently, potentially offer our own balance sheets or other partnerships. So, I think we're always looking at ways to enhance the free cash flow conversion in the business.

Okay, lastly, the growth rate, year-over-year growth rate for accounts billed on enterprise business has accelerated in the last two quarters to above 50%. Is there a large, law of large numbers we should think about? I guess I'm trying to understand, can you sustain that growth rate for the next couple of quarters? And then which industries are enjoying the best business development trends as it relates to that business?

Sure. Let me just talk about the industry sectors. I think we've really successfully taken a simple approach, right? Like we follow the money, okay? At its heart we're in payments, right? So you can appreciate the logic of that. , we've tried to build tools that are particularly work well in where there are large pools and there's complexity. And a couple that have caught our eye where we're active and we're winning logos are construction, that is a bit of a quagmire, right? Company that, it's a sector that needs cash flow acceleration, it has a broad spectrum of participants with a multi-trillion dollar industry in the United States that's largely lacks automation. So, we've got tools that I'll say are suited for the enterprise segment that we are deploying and are winning. We have those that are for the middle to small market segment that I alluded to in acquiring that we've already are in beta testing and we'll be going out to the broader community. So, that's an area where linking that AR, so I take in money, but then I also have to make payments out, is a natural -- there's a natural solution elegance to that. So, that's what we're bringing to market across enterprise and mid-market. Enterprise is more ISV focused, mid-market to small market is more with our own proprietary technology, it's called MX build. So, that would be one example. Another is the investment management space. Again, very archaic, terrible banking experience. I think if you talk to go talk to our debt holders and they're raising money from LPs, they'll tell you it takes six weeks to set up an account, even for an existing LP, terrible experience. We can do that in six minutes because we virtualized all the banking and have already pre-qualified participants for AML, KYC AML, KYC, KYB, OFAC, FinCEN, right, these are modern banking automations that apply very well in industries like that. So, those are two of the more substantial that we already have customers on platform, we are learning more and more, and we see tremendous opportunity. And then, I'll mention another that's been a mainstay for us is in real estate. That whole segment in the way transactions occur through real estate, everything from escrow and how closings and broker fees occur, to the renter experience and how that's transforming through the property management and this idea of being able to manage cash flow at a property level through AR and AP solutions that persist at a property level, all of that requires a meshing of payments and banking. And those are the segments where there are large flows of money, large pools. They take some sophistication to address, so not everyone's going to get there. And we're seeing a lot of opportunities to win and are deploying resources in those verticals.

Okay, thank you.

Our last question today will come from Hal Goetsch with B. Riley. Please go ahead.

Hey, good morning guys. I've got a quick question. You guys gave some great detail on gross profit. You said 58% of Q4 gross profit was from monthly fees. And I was wondering if you could give us some color on the components of that. How much of that gross profit of fees is dispersed amongst the three different segments? Is that mostly in enterprise or B2B? Or is there still like a pretty good amount of gross profit in monthly subscriptions for even in the SMB? Can you give us some color on that?

Sure, Hal, happy to jump in there. So, yes, the various components that we have fixed monthly fees or even in the SMB business it's not all transaction or volume dependent. There are fixed monthly fees per account, so, that figure, if I think about gross profit, that's going to be 15 plus percent or so of gross profit in the quarter. And then, you have the monthly fees within the enterprise business along with the income we make on our permissible investments. Those all drive part of the balance of the recurring gross profit that's not transaction or volume dependent. So, a lot of it does sit in enterprise, but SMB has a very consistent level of recurring gross profit as well.

Would it be like monthly fee like for the -- like $20 a month or it would depend on the client and how much volume they do or the hardware or software they use. Is that kind of where it comes from?

Yes, it depends on the nature. I'll describe it this way. It's the nature of the subscription. So, some pay platform, and then we manage accounts on their behalf. And then, others think of it like pay by the drink, where each account has a subscription. And the reason that is different, Hal, is there are certain expenses they may be passing along to their end market and others they are not. So, those are the driving factors. And it's very subscription or I should say subscriber/integrated partner oriented. It'll depend on their business model.

Yes, and I know it's a really detailed question, but of this kind of recurring business of it's not dependent on Bankcard volume, kind of can you give us a feel for like, what that grew versus the previous year? So we know I mean this is, like, really high value business then. Well, I'm getting at it. It's like, this is a growing part of your business. This is very high multiple types of things, and we're not a high…

Yes, that was one. I have to call it's like it's a great question and that's kind of what we're saying is every dollar is not created equal, right? So I know Tim's got some stats prepared for you.

Okay.

Yes. So, without getting into specific dollars, but if you think about just the percentage, obviously, we mentioned 58% of gross profit was recurring in Q4 of this year. That number was 43% last year in Q4, right. So, for full-year '23 it was 51%. So, we're continuing to see that percentage grow and drive higher value in the business, right? That is repeatable, highly visible recurring gross profit that we see and that's why we're starting to report that and give you a better sense of the consistency and the profitability.

All right, terrific. Thanks, guys. Great quarter. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Tom Priore for any closing remarks. Please go ahead, sir.

Well, just like to thank everyone once again for taking the time to learn more about Priority and certainly listen to our perspective on the potential for our business, the industry at large and where we see the opportunity set. And we are hopefully, as you can see from the quality of our performance and where we are projecting for the upcoming year, we are laser-focused on delivering results. So, thank you very, very much. I hope everyone has a great remainder of the week, and we look forward to the next opportunity to connect, and measure how we did. Thank you.

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