Good day, and welcome to the Priority Technology Holdings Second Quarter 2024 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [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 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 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 second quarter 2024 earnings call. I'd like to start today by highlighting the positive trends we continue to see throughout Priority, and then Tim and I will provide an update on important developments within each segment and the broader enterprise. As you saw in this morning's press release, in the second quarter, we again reported record financial results by capitalizing on our leading unified commerce platform that delivers elegant product solutions across our segments and dedicated customer service that is committed to our partners' success. Building on the positive momentum we saw to start the year, we delivered exceptional results in SMB acquiring, B2B Payables and Enterprise Payments in the second quarter. Our unified commerce vision continues to resonate with customers, combining payments and banking functionality on a single platform, accelerated by the strength of our diverse business lines that were positioned to benefit from historically elevated 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 exceed $1 million as we process nearly $125 billion in annual transaction volume during the prior 12 months, while administrating over $1 billion in average daily deposits during the quarter. Slide 4 highlights our consistent financial performance during the second quarter. Revenue of $219.9 million increased by over 21% from prior year. This led to a 22% increase in adjusted gross profit to $81.7 million and a 25% improvement in adjusted EBITDA to $51.6 million. Adjusted gross profit margin of 37.2% increased 40 basis points from the prior year quarter, highlighting the strong and improving operating leverage of our organization. Encouragingly, our purely organic growth trends are equally strong, posting a top line revenue increase of…

Thank you, Tom, and good morning, everyone. As I review the second quarter results, please refer to the supplemental slides or the MD&A for further details. Our MD&A is included in the Form 10-Q that was filed with the SEC this morning and provides a discussion of our comparative second quarter results. A link to that filing can also be found on our website. Consistent with the first quarter, our strong financial performance in the second quarter was driven by the diverse and countercyclical mix of our business segments along with continued growth in our higher margin operating segments. The highly recurring nature of our business model also remains strong with almost 59% of adjusted gross profit in Q2 coming from monthly fees or revenues that are not dependent on transactions or bankcard volume. I'd also highlight our organic growth rates which continue to outperform compared to many industry competitors. If you adjust for the impact of Plastiq, which was not part of our financial results in Q2 of last year as well as for the impact of the large reseller that we've discussed on prior calls, Priority had year-over-year organic growth in Q2 of 17.5% for revenue 18.9% for adjusted gross profit and 25.7% for adjusted EBITDA. When you combine those industry-leading organic growth rates with a scaled business that produces a high level of recurring gross profit, you can easily understand why we're excited about our business and the value that we believe has been built at Priority. Before moving to the segment-level financial results, I want to take a minute to discuss a change in our reporting metrics for this quarter and going forward. Historically, we provided revenue, adjusted gross profit and operating income at the segment level. As you'll note in today's presentation, we still provide…

Thank you, Tim. Now that we're a little more than halfway through the year, I'd like to take a minute to highlight where Priority is in its journey. Everything we did over the past several years, from accelerating our investment in our unified commerce, payments and banking infrastructure, to our focus on building countercyclical business lines, to our acquisition of Plastiq a year ago was done with intention and purpose to provide our customers with an elegantly delivered experience combining acquiring, payables and banking solutions on a single platform. Our financial and operating results demonstrate that we've continued to execute with exceptional consistency and a forward-looking vision that resonates with the constituents we serve. Our tech-enabled service platform is delivering on the promise of a financial tool set that can accelerate cash flow and optimize working capital for our partners. The success of our capabilities and style of engagement is evident, not only in our organic growth numbers and improving margins that have meaningfully outpaced our peers for several quarters now, but also when talking to our customers and partners. Let me offer some current examples of the unique advantage of our platform that elegantly delivers a suite of embedded payments and banking solutions, which can be smoothly adopted within our customer networks. Since launching Plastiq bill payment in late January with our acquiring partners, run rate processing volumes continue to pick up steam having grown quarter-over-quarter by 200%. Additionally, Q2 downloads across our POS suite continue to represent approximately 20% of total new processing activity. And we continue to activate new distributors with 35 new resellers executing contracts during the quarter. And the growing penetration of our POS tools will increase our mix of recurring SaaS revenue, improve merchant loyalty and continue to open additional paths for banking and…

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Tim Switzer with KBW. Please go ahead.

Hey good morning. Thank you, guys for taking my question. Can we touch on the recapitalization real quick? I believe most of that was accomplished in May. So the full run rate impact I don't believe was in Q2 results. So what's the incremental impact to Q3? And if I remember what you guys said last quarter, I think the preferred dividend would be around $4.7 million in Q3. Is that still the right number?

It is. Yes, I think we're calling it $4.8 million at this point based on the final balance on the pref. But on a go-forward basis, we should be running a $4.8 million a quarter total preferred dividend, about $2 million of that's PIK and the other $2.8 billion or so is cash. And then obviously that PIK component will grow over time.

Okay. Perfect. And then could you guys talk about the expense outlook. You mentioned an acceleration due to a few different items in the back half of this year. What's the pace of that? Should it be like even acceleration in Q3 and Q4? And then, what does it mean for 2025? Should there be continued investments on top of those that we should expect? Just would look -- would like some more color there please.

Sure. Yes. I think, it will be relatively evenly spread between Q3 and Q4, maybe a 60-40 split there with heavier balance towards Q4 just given some of the timing of the audit process and some of the SOX 404 aspects of it. And then as you think about next year that should normalize, right? We're not going to see a further acceleration of those costs going into next year.

Great. Okay. That's good to hear. If I can get one more too. You kind of mentioned how the Enterprise business is a little countercyclical to the macro environment. But what kind of impact would you expect to the rest of the business and just the company broadly, if we had a bit of an economic slowdown? And then, do interest rates factor into that at all one way or the other? Thank you.

Yes, I can answer those. Maybe I'll go in reverse. So if you think about interest rates, obviously, we benefit on one side with the balances we have in putting those into permissible investments which are largely earning income at roughly Fed funds or so type rates. And then on the flip side obviously, we have the interest expense on the debt as well as the cash portion of the preferred dividend. If you look at those balances, we're almost perfectly hedged right now. So if there's a decrease in rates depending on what the Fed does in the balance of the year, there's almost zero impact on free cash flow. There's a roughly $600000 per quarter impact to EBITDA for every 25 basis points of rate cuts. But again zero impact to cash flow given we're hedged on the debt side there. And then more broadly, as you think about the economy and going into next year if there is a hard landing and we start to see some softness, I think we'll see some impact on the SMB side, but I feel like we're able to continue to grow and offset that decline you may see within the broader macro environment because, we're continuing to maintain very high retention rates with our existing reselling partners, maintaining good retention rates with our merchants. We've seen some impact this year and last year candidly from same-store sales. But as we think about our retention rates and what we can control, those have maintained very steady levels. But you have seen some impact from same-store sales. So, that could have another impact next year, but I think we'll continue to grow through that.

Great. Thank you.

One other point you may just want to take a peek at. If you go look at the volume growth across MasterCard and Visa and then look at our volume growth, you'll see we're winning market share in the acquiring segment relative to total volume. So, given the tool set we're rolling out now, we -- across some new segments in hospitality, in salon, in construction, we feel pretty optimistic, we can continue to grow the market share there, which would of course, offset some of the potential recessionary softness in spending, if it were to emerge

Okay. That’s really helpful. Thank you, guys.

And the next question comes from Jacob Stephan with Lake Street. Please go ahead.

Hey, guys. Thanks for taking my question. Congrats on the quarter. Maybe if you guys could just help us kind of piece out. Obviously, you referenced 59% of adjusted gross profit is from recurring sources or non-transaction-dependent sources. Maybe if you could just kind of help us piece those non-transaction dependencies out of your business so we can really kind of understand the driving forces between – or being behind the recurring gross profit growth.

Sure. Happy to do that, Jacob. Yes, so if you think about the revenue and our split obviously, there is transaction volume, right Bankcard volumes, right, that's going to be what we consider reoccurring but it's not in our recurring gross profit numbers that I quoted, right? So within the recurring aspect we have, we have monthly subscription fees and monthly fees that we earn on a regular basis right and those are not transaction dependent or volume dependent. We have the income on the permissible investments, that's not volume or transaction dependent. And then we have other fees that we generate on a monthly basis from merchants and resellers as well as within the enterprise segment. So there's a number of different aspects of that that are very subscription-like, as you think about the software we deploy and the way we earn revenue across the business.

Okay. Got it. That's helpful. And then obviously, it's over a year here since you guys acquired Plastiq. I'm just curious do you see any kind of seasonality factoring into the back half of the year with the Plastiq?

Not as much seasonality. I think what you do see is that – from quarter-to-quarter you may have some larger enterprise customers come in and contribute some meaningful volume. That volume tends to come through at obviously a little bit lower margin given the scale of those customers. And that's – it's a little harder to predict. But I think we continue to expect those types of customers to use the Plastiq product offering and continue to contribute to the back half of the year. But not as much seasonality as much as there's maybe some timing differences with some of those larger customers.

Okay. And obviously, nice to see the progress on the balance sheet in Q2 here. You took out the majority of the preferred but obviously, the cash balance and revolver, the $70 million revolver isn't quite enough to take out the remaining. But I'm curious, how you're thinking about kind of the remaining $106 million of preferred?

Yes. We'll continue to evaluate the balance sheet. And obviously, we look at a lot of different uses of capital, whether it's thinking about acquisitions to grow inorganically or investing in the business to grow organically. We'll also look at the preferred equities and other use of capital. When we did the recapitalization, we closed at roughly 4.5 times leverage, we're already down below 4.25 at the end of this quarter. So we've already seen a quarter turn of deleveraging just intra-quarter with EBITDA growth. If you just take the numbers for the balance of the year and if you just assume the midpoint of EBITDA guidance and assume we don't pay down another $1 of debt from here to the end of the year, you'll be closer to four time leverage. So you can start to do the math to figure out the capacity you have to address the rest of the balance sheet.

Okay. Got it. Very helpful. Appreciate it, guys.

Thanks.

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

All right. Well thank you. First of all, thanks for the questions. And just want to express our appreciation for everyone attending the call and your interest in Priority and the platform we're building for we think is a future of commerce. And we'll get back to executing. So thanks everyone for your time. Hope everyone has a great weekend. Enjoy the rest of the summer.