Good day, and welcome to the Priority Technology First Quarter 2024 Conference Call. [Operator Instructions] [Audio Gap] 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 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. 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 first quarter 2024 earnings call. I'd like to start today by highlighting the positive trend focused on delivering the best products and service in the industry drove record first quarter results that placed Priority on a strong financial trajectory for 2024. Maintaining the momentum we established throughout 2023, we delivered solid results in SMB acquiring, B2B payables and Enterprise payments in the first quarter. Our unified commerce vision continues to resonate with our customers, combining payments into our diverse business lines that 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 $1 million as we processed over $120 billion in annual transaction volume during the prior 12 months, while administrating $980 million in average daily deposits as of the end of the quarter. Slide 4 highlights our consistent financial performance during the first quarter. Revenue of $205.7 million increased over 11% from the prior year, and this led to a 21% increase in adjusted gross profit to $76.4 million and a 23% improvement in adjusted EBITDA to $46.3 million. Adjusted gross profit margin of 37.1% increased 300 basis points from the prior year quarter, highlighting the strong operating leverage of our purpose-built platform. As you can see from our Q1 results and the reiteration of our full year guidance, we continue to expect that the robust growth and margin trends in our business channels will deliver full year revenue of $875 million to $890 million, an increase of approximately 16% to 18% over 2023, and generate full year adjusted EBITDA of $193 million to $198 million, a 15% to 18% increase over 2023. Our growing…

Thank you, Tim. Before wrapping up, I'd like to take a minute to talk about the differentiated organic growth performance of Priority that Tim noted during his comments. To summarize, during the past 12 months, on a purely organic basis, Priority's revenue increased 16.3%, while gross profit expanded 20.3%, resulting in 29.2% improvement in adjusted EBITDA. Our consistently market-leading organic growth results reflect that today's businesses are adopting a broader expectation for their payment technology providers to deliver solutions that transcend basic merchant acquiring and help them accelerate cash flow and optimize working capital. Priority was built with intention during the past several years to meet these exacting customer needs and be their trusted partner by establishing our Priority Accelerated Commerce Engine, delivering tech-enabled services that collect, store, lend and send money on a single platform for acquiring, payables and banking needs. The value of our product suite is evident not only in our growth numbers and margins, but also in talking to our customers and partners as they expand their engagement with our solutions. As evidence, consider the following opportunities being harvested within our existing customer base and distribution channels in the first quarter alone. Since launching the cross-selling of Plastiq bill payment in late January with our acquiring partners, run rate revenue contribution from that channel already exceeds $1.2 million annually and has been growing month-over-month by over 100%. Additionally, Q1 downloads across our POS suite represented 20% of total new boards as we continue to activate new distributors with 8 going live this quarter and 27 new resellers executing contracts. The growing penetration of our POS tools will increase our mix of recurring SaaS revenue, improved merchant loyalty and continue to open additional paths for banking and payables product adoption that increases margin per merchant. Our Banking…

[Operator Instructions] And today's first question comes from Tim Switzer with KBW.

Can you guys talk a little bit about the integration and growth of Plastiq now that it's been in the run rate for a couple of quarters now? How has that trended relative to your expectations? And if there's been any surprises one way or the other on performance and conversations with customers as you continue with it?

Yes. Sure, Tim. I would say, look, nothing that has been a surprise. The -- we had pretty conservative estimates going in. I would say from a financial standpoint, it's outperforming those expectations and kind of what we -- but we had a very -- we have a conservative outlook in terms of synergizing the business. So I think you may recall when we first announced it, we had it as a drag to EBITDA through the end of 2023. We were able to get at EBITDA positive and net income positive before the end of the year. The trend on it has accelerated. And we would anticipate through the remainder of the year, it will outperform initial expectations. The -- but it's been a quick turnaround. You may recall when we first acquired it, projected EBITDA or I should say its run rate EBITDA was probably negative mid- to high-teens. And that's been reversed very, very quickly. We certainly think it could do something in the high-single digits to low-double digits of adjusted EBITDA contribution and certainly be on that run rate by the back half of the year. And that's been a result of, as I noted in other comments, integrating it into other channels. That's been successful. But we have -- that's blocking and tackling that we just need to continue to do. And then we've seen -- and this was our suspicion. We thought it could really be positioned for larger customers, more enterprise-oriented that could more fully leverage their credit capacity as a cheaper source of working capital. That's proven to be the case. So we're seeing larger enterprise customers that are doing $10 million, $20 million, upwards of $50 million in payments using our buyer funded strategies that Plastiq's technology enabled as a complement to our broader payables offering. So that's been a source of growth, and we'll expect that to -- that continue to be the case.

Great. Yes, that sounds good. And following up on that, are there any other areas or businesses you'd be interested in acquiring or any other M&A activity you guys are looking into right now?

Look, we're -- that's something we're always on the look for. And we've -- B2B is definitely a segment that we think we can have differentiated performance in. And we think we've proven it more than once. And let's say, the acquisition of the YapStone real estate, RentPayment.com, the way we were able to quickly turn that, ended up monetizing that with a sales MRI at a multiple of return. We've now turned around Plastiq very quickly. The engine has just been built to refactor software and payment technology assets in a unique way. So we do think there's a number of attractive things in B2B that we're tracking. There's some other vertically focused software offerings that we think payments monetization has been underpenetrated that we can be successful at. So definitely looking at a handful of sectors, but they -- I would say more of them fall into those segments than traditional merchant acquiring, although we've got a couple there that we think can provide value to the distribution. But our greater focus is more towards payables and vertical SaaS/payments opportunities. Tim O’Leary: And Tim, I will just layer on top of that, too. Obviously, we're always looking at acquisition opportunities to increase shareholder value. But we're constantly also evaluating just the best use of our capital, right? And obviously, as you can tell by the presentation today, we've used a portion of our capacity to take out the redeemable preferred equity. So we're going to continue to evaluate the best use of capital and do what we feel is providing the best overall shareholder value, whether it's addressing the capital structure or addressing M&A or investing in the business for faster growth in certain verticals we already have.

Got you. Yes, that all makes sense. If I could add one more real quick, please. The depreciation and amortization expense was down quite a bit quarter-over-quarter. Where should we expect that to trend over the rest of the year? Tim O’Leary: I think the runway we're on now is what you should continue to expect. It declined as we had some assets that were fully depreciated. So that's why you saw the reduction from a quarterly basis. But the run rate you have now from this quarter is more of what you should expect for the balance of the year.

[Operator Instructions] Our next question comes from Jacob Stephan with Lake Street.

I guess I just wanted to get some color on kind of the B2B segment. When I run the math, $17.3 million came from Plastiq in Q1 here. Total revenue in that segment was flat. Maybe you could just help us understand, in Q1, Plastiq -- sorry, in Q4, Plastiq was roughly flat with that $17.3 million? Or am I missing something? Tim O’Leary: No, that's accurate, right? I think the revenue was pretty flat. You have some larger payers that come in at quarter ended times, and sometimes those volumes vary, which drives revenue. But those payers tend to come in with big volumes, but a little bit lower margin. So I think the revenue was flat, but the gross profit in that business improved quarter-to-quarter. So I think that's what we're certainly measuring and thinking about the net that we keep on the revenue side. So I think we're optimistic where the business sits today and the trends it's on. And as Tom mentioned, we feel like that by the end of the year is going to be at a run rate of EBITDA that's going to be approaching double digits millions of EBITDA.

If I can add just real quick on that question. The other thing we've seen, because we just have a more expansive offering from what Plastiq had originally been or how they had originally been oriented, we've seen margin expansion within that business because we've been able to offer other fast pay tools and things that the constituent using Plastiq found valuable that increased that gross profit take rate, as Tim noted, without necessarily increasing volume because we're adding revenue on pay in and pay out given some of the tools that we've been able to add into the mix.

Okay. Got it. And then maybe just kind of remind me on the reseller diversification, I believe we're going to be over -- or lapping that in Q2 here or at least kind of the start of it. Is Q2 or is it going to be Q3 where we kind of see the first quarter post diversification? Tim O’Leary: Yes. Q3 will be a clean comparative quarter. Q2, there will be some year-over-year growth through, but it will be half of what we had in Q1 of this year, right? We actually saw the business with that large reseller actually grew in Q1 from where it was in Q4 and Q3. So as we talked about, it was truly a diversification effort. It wasn't a decline in the business overall. So I think we're optimistic that, that will have growth for us in the back half of this year, but you will see some headwind in Q2, but it will be less than half of what we had here in Q1.

Got it. Okay. And then maybe just one more on kind of the pending recapitalization here, certainly nice to see you guys kind of targeting that preferred equity out there. But maybe you could just kind of help me understand how much does this kind of reduce that preferred dividend by and ultimately, kind of what's the objective for kind of the excess free cash flow here? Is it to readdress the debt or continue to target the preferred first? Tim O’Leary: Yes. So if you think on an annualized basis, it's about $11 million of preferred dividend now going forward on the cash component of that. So pretty meaningful reduction from where it is today. And if you think about the free cash flow savings we'll have on a net basis between the lower interest rate on the new debt, right, we're obviously reducing the interest rate by 100 basis points. We are going to have a higher debt quantum we're paying that on, though. But net-net, we're going to have north of $5.5 million of annual free cash flow savings, which -- that should take us meaningfully north of $50 million of estimated free cash flow for the year. We're probably pushing closer to $60 million as we think about our forecast and what we've expected before this refinancing. So we're optimistic that this is going to help from a free cash flow standpoint, and we'll continue to evaluate the use of that, whether it's some of the M&A opportunities Tom talked about or continue to take advantage of our debt capacity and further address the cost of capital by looking at the balance of the preferred equity.

Thank you. And that concludes our question-and-answer session. I'd like to turn the conference back over to Tom Priore for closing remarks.

All right. Well, I would like to thank everybody for taking the time to allow us to reflect on the first quarter of [ 2023 ]. As you can see, it was quite a successful one. I feel like the business is set up to continue to perform at that rate through the remainder of the year, and we'll look forward to the opportunity to update you once again as we progress through quarter 2. Thank you, everyone, and I hope everyone has a great remainder of the week.

Thank you, sir. Everyone, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.