Q4 2022 Priority Technology Holdings Inc Earnings Call
Speaker 1: And.
Speaker 1: The End
Speaker 2: Good morning and welcome to the Priority Technology Holdings 4th Quarter and Full Year 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.
Speaker 2: To ask a question, you may press star then one on your touch tone phone. To withdraw from the question queue, please press star then two.
Speaker 2: Please note this event is being recorded. I would now like to turn the conference over to Chris Kettman. Please go ahead. Please turn the conference over to Chris Kettman.
Speaker 3: Good morning, and thank you for joining us. With me today are Tom Priori, Chairman and Chief Executive Officer of Priority Technology Holdings and Tim O'Leary, Chief Financial Officer.
Speaker 3: 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.
Speaker 3: whether as a result of new information, future events, or otherwise.
Speaker 3: We provide a detailed discussion of the various risk factors in our SEC filings and we encourage you to review these filings.
Speaker 3: 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.
Speaker 3: With that, I would like to turn the call over to our Chairman and CEO , Tom Priore.
Speaker 4: Thank you, Chris.
Speaker 5: And thanks to everyone for joining us for our fourth quarter and full year 2022 earnings call.
Speaker 5: 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 project it into 2023.
Speaker 5: First and foremost, the business is performing the way we anticipated.
Speaker 5: consistently growing market share and SMB acquiring, and producing strengthening results in B2B and enterprise payments.
Speaker 5: 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 were positioned to benefit from higher interest rates and the current economic environment. For more information, visit www.fema.gov
Speaker 6: Second.
Speaker 5: Not only are we outperforming our peers, but the key metrics in our business have continued to improve. Daily pace patient, video re- pieces effective,
Speaker 5: Our full year 2022 growth traits and margin expansion are representative of the first quarter trends we have seen to date in 2023.
Speaker 5: LAMB
Speaker 5: 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.
Speaker 5: given the recent struggle of the banking sector and the general crisis of confidence in banks among businesses of all sizes.
Speaker 5: 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 money will fuel results in the quarters and years ahead.
Speaker 5: With that as a backdrop, let's dig into the numbers.
Speaker 5: As you saw in our earnings release, we continued our positive momentum with an exceptionally strong fourth quarter to close out a strong 2022.
Speaker 5: Our fourth quarter revenue increased 23% from the prior year to a record 177.6 million.
Speaker 5: which led to a 25% increase in gross profit to $61 million and a 21% improvement in adjusted EBITDA to $39.8 million.
Speaker 5: For the year, revenue increased 29% to $664 million, growing organically by 23% in the fourth quarter and 19.1% in 2022.
Speaker 5: Full year adjusted gross profit and EBITDA both grew 46 percent.
Speaker 5: with adjusted gross profit reaching $226.9 million and adjusted EBITDA coming in within our target at $140.3 million for the full year 2022.
Speaker 5: Adjusted gross margin of 34.2% increased 410 basis points from 2021, demonstrating the operating leverage of our purpose-built platform.
Speaker 5: As I earlier noted, we anticipate that our strong fourth quarter performance and established trends in our business channels will continue.
Speaker 5: As such, we are expecting to deliver consistent double-digit top-line and bottom-line growth
Speaker 5: projecting revenue of $740 to $755 million and adjusted EBITDA of $160 to $165 million for the full year 2023.
Speaker 5: For those of you who are new to the company, slide seven highlights the architecture of our proprietary unified commerce platform that is purpose built to collect, store, and send money, combining robust payments and banking functionality to monetize the merchant networks we serve.
Speaker 5: Our customers and the current market conditions continue to reinforce our belief that systems combining features of both payments and banking to accelerate cash flow and distribute funds to multi-party environments will be critical as businesses put greater demands on software and payment solution providers.
Speaker 5: We are committed to meeting their growing demand by simplifying the customer experience for our partners. Thank you for your attention. We are committed to meeting their growing demand by simplifying the customer experience
Speaker 5: and making working with priority as easy as one, two, three.
Speaker 5: Partners simply choose the application that best fits their business, whether that is a small business operator choosing from MX merchant and the MX POS suite, an FI or a middle market customer adopting CPX for automated payables,
Speaker 5: or an enterprise partner connecting to us via our API.
Speaker 5: They select the passport financial tools that best fit their needs and begin to move money.
Speaker 5: At this point, I'd like to hand it over to Tim who will provide further insight into our segment level performance during the fourth quarter and full year.
Speaker 5: along with current trends in each that inform our guidance for the upcoming year. 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.
Speaker 5: Our MD&A is included in the Form 10K that was followed with the SEC this morning and provides a discussion of our comparative full year results.
Speaker 5: 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.
Speaker 5: 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.
Speaker 5: For the full year, we had almost 15% growth in bank card dollar volume across all segments to roughly $62 billion.
Speaker 5: We had 10.5% growth in bank card transaction count to 640 million transactions, and just under 4% growth in average ticket size to $96.50.
Speaker 5: If you include ACH, debit, and other volumes, the total payment volume for the year was $112.8 billion.
Speaker 5: Again, those metrics are all for the consolidated business.
Speaker 5: I'll now go into more detail in each of the business segment's results for the fourth quarter.
Speaker 5: Let's start with S&B payments on slide 10.
Speaker 5: 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 and bank card dollar volume to roughly $14.9 billion.
Speaker 5: which included 9% growth in bank card transaction count and was slightly offset by a decline in average ticket size to $92.61 from just over $94 in the fourth quarter of 2021.
Speaker 5: We finished the quarter with 259,000 merchants, which represents an increase of 7% from the prior year.
Speaker 5: The average merchant count for the quarter was just over 257,000, which is also 7% growth from Q4 of 2021.
Speaker 5: This growth in merchant count was driven by continued strong boarding trends where new monthly merchant boards averaged 4600 per month throughout the quarter. That compares to an average of 3600 per month in the fourth quarter of 2021 and an average of about 4700 per month for all of 2022. Continuing with SMB on the next page, but moving down to P&L.
Speaker 5: reseller partners driving more of the growth, but those partners also generally receive higher residual commissions.
Speaker 5: Lastly, for SMB,
Speaker 5: Quarterly operating income increased by 42% to almost $15 million as a result of operating leverage within the business segment.
Speaker 5: Moving to B2B payments, we had revenue of $2.8 million in the fourth quarter of 2022, which was a decrease of 48% for the fourth quarter of 2021. This decrease was the result of the previously discussed reduction in revenue from managed services due to the final wind-down of certain programs with a large customer. To help put that wind-down in context, we had a decrease of $2.8 million in revenue from managed services due to the final wind-down of certain programs with a large customer. This decrease was the result of the final wind-down of certain programs with a large customer.
Speaker 5: managed services generated on average over $2.7 million of quarterly revenue in the first half of 2022. That compares to just over $300,000 in the fourth quarter as the program completed its wind down in October .
Speaker 5: Going forward, we expect to see a nominal amount of managed services revenue that will be generated by some smaller legacy programs.
Speaker 5: Focusing on the CPX business within B2B, revenue for the quarter was relatively flat at $2.5 million, but it was negatively impacted due to the timing of certain incentives.............
Speaker 5: Normalizing for that, CPX would have grown almost 9% in the quarter.
Speaker 5: The growth in CPX was fueled by just under 8% growth in ACH volume from Q4 of 2021 to Q4 in 2022, and 11% growth in issue and volume.
Speaker 5: With respect to B2B's profitability on slide 13,..................
Speaker 5: Adjusted gross profit declined by 35% as a result of the managed services wind down, but you can also see how the adjusted gross profit margin increased by over 12 percentage points during the quarter as the lower margin managed services business rolled off. For the quarter, the B2B segment had an operating loss of $1.1 million.
Speaker 5: as certain costs related to the Managed Services Program weren't able to be fully removed from the P&L and Q4, but have since been reduced. Moving to the Enterprise segment on the next page.
Speaker 5: Q4 revenue of $24.9 million was an increase of $7.7 million, or 46% from $17.1 million in Q4 of 2021.
Speaker 5: As a reminder, CFT pay was acquired in September of 2021, so the strong year-over-year growth in Q4 is entirely organic and not the result of any grow-over from the acquisition timing.
Speaker 5: Favorable trends in new enrollments and increase in the number of billed clients and the benefit of rising interest rates all contributed to the fourth quarter revenue growth.
Speaker 5: I would also highlight that the Q4 performance represents almost 15% sequential growth from the third quarter of 2022.
Speaker 5: As shown on the next page, adjusted gross profit for the enterprise segment increased by 50% to $23.3 million and adjusted gross profit margins expanded by 300 basis points to 93.6%.
Speaker 5: Operating income for this segment also benefited from operating leverage, as exemplified by its 121% growth, compared to revenue growth of 46%.
Speaker 5: We remain excited by the revenue and earnings opportunities inherent in the enterprise segment going forward.
Speaker 5: Operating expenses are shown on page 16 and totaled $42.8 million for the quarter, an increase of 20% from the prior year.
Speaker 5: This change is primarily driven by increased expenses in the business resulting from investments made in both personnel and technology to support the strong growth experienced in 2022.
Speaker 5: Salaries and benefits of $16.9 million increased 41% from Q4 2021 as a result of both an increase in headcount and wage increases, which is consistent with industry and broader macro trends.
Speaker 5: The headcount increases supported growth across the company and were added in both the U.S. and our Development Center in India.
Speaker 5: We finished Q4 with approximately 870 employees, including roughly 300 in India, compared to just under 800 at the end of 2021.
Speaker 5: I do want to highlight that the $16.9 million of salaries and benefits in Q4 was only a modest increase from $16.4 million in Q3, as we remain focused on extracting operating leverage from the investments that have been made to date in both the team and technology.
Speaker 5: SG&A of 7.9 million increased 27% from 6.2 million in Q4 2021. Again, continued investment in the business expansion drove that level of growth. But consistent with my comments on salaries and benefits, we will continue to focus on our cost structure in order to drive operating efficiencies.
Speaker 5: I would highlight that the Q4 spend was almost $3 million lower than Q3 levels due to the roll-off of certain non-recurring expenses combined with lower marketing expenses following the priority power conference that we hosted in September .
Speaker 5: Appreciation and amortization of 18 million dollars for the quarter increased modestly from the last year.
Speaker 5: Moving to the next slide, adjusted EBITDA for the quarter was $39.8 million, which was an increase of 21% from $32.9 million in Q4 of 2021. Working down the EBITDA walk on this slide, I'll start with Q4, but also discuss the full year results. The largest items added back to consolidated net income are obviously interested in the overall performance of the EBITDA.
Speaker 5: reiterate from prior calls that we do have a natural hedge in place for almost 90% of the floating rate debt. Given the interest income we were able to generate on the deposits in the enterprise segment.
Speaker 5: If you include the floating rate component of our preferred stock,
Speaker 5: the natural hedge from the deposits cover about 60% of our floating rate liabilities. The further adjustments to arrive at adjusted EBITDA for Q4 include non-cash stock compensation of 2 million and approximately 1.3 million of other adjustments which consists of certain non-cash or non-recurring expenses. For the full year adjusted EBITDA of 140.3 million, the total amount of
Speaker 5: quarter was $623.2 million of gross debt and $604.7 million of net debt.
Speaker 5: This reduction is net of continued investments in the business and also after repurchasing 1.7 million of PRTH shares during the fourth quarter and 5.9 million during the full year.
Speaker 5: From a liquidity standpoint, we had $27.5 million of borrowing capacity under a revolving credit facility, in addition to $18.5 million of unrestricted cash on the balance sheet at quarter end.
Speaker 5: I would also note that subsequent to Q4's quarter end, we've paid down another $6 million on the revolver.
Speaker 5: On slide 19, the preferred stock on our balance sheet totaled $235.6 million at December 31st and is net of $21.1 million of undercreated discounts and issuance costs. The fourth quarter preferred dividend of $10.5 million is comprised of $5.3 million paid in cash and $4.3 million of a PIC component.
Speaker 5: That is supplemented on our income statement with the accretion of discounts and issuance costs of just over $800,000.
Speaker 5: Before turning the call back over to Tom, I wanted to further address our revenue and adjusted EBITDA guidance for the full year of 2023, which can be found on slide 20 in the presentation.
Speaker 5: Based on continued strong growth and trends in the business, we are forecasting 12 to 14 percent growth in revenue to a range of $740 to $755 million for the year.
Speaker 5: As I mentioned previously on the call, we are focused on leveraging the investments already made in the team and technology throughout 2022, which should lead to overall margin expansion during 2023. As a result, we are forecasting adjusted EBITDA growth of 14 to 18 percent, which would result in a range of 160 to 165 million for the full year.
Speaker 5: If you break that growth apart, we're forecasting continued double digit growth in revenues from SMB, but we also expect to continue to see some modest margin compression in the portfolio as our larger reseller partners continue to drive more of the growth in the business.
Speaker 5: B2B's top line growth will be skewed by having an anniversary of the runoff from managed services.
Speaker 5: but we expect CPX to show continued growth that should also result in margin expansion for the segment given the higher margin profile of CPX compared to managed services.
Speaker 5: Lastly, Enterprise is forecast to continue its strong growth, although we have tempered expectations a bit throughout 2023, to account for the growth already experienced in the second half of 2022. Further, we expect the margin profile in the Enterprise segment to remain consistent with its exit rate from 2022. With that, I'd now like to turn the call back over to Tom for his closing comments.
Speaker 7: Thank you, Tim. Before wrapping up, I'd like to speak to one of the more significant points we made during our Q3 discussion.
Speaker 7: During it, we called on 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.
Speaker 7: 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.
Speaker 7: as well as enterprise partners will result in outside benefit to our shareholders in the coming years.
Speaker 7: We also highlighted research from leading research firms McKinsey and Bain.
Speaker 7: about the trends in payments and banking commonly referred to as embedded finance.
Speaker 7: Your conclusions reflected that.
Speaker 7: Small businesses starting up today may never interact with a conventional bank.
Speaker 7: by logging into their e-commerce or accounting platform.
Speaker 7: They can open a deposit account, order a debit card, and meet most of their financing needs.
Speaker 7: to embed financial products into a single, seamless, convenient, and easy to use customer experience.
Speaker 7: They predict that the winners will likely provide a full suite of services including some regulatory oversight compliance.
Speaker 7: They predict that the winners will likely provide a full suite of services including some regulatory oversight, compliance, origination and fulfillment.
Speaker 7: Enablers that take the hassle out of embedded finance for platforms through easy integration and great servicing should hold the upper hand.
Speaker 7: They can choose high volume self-service model or higher touch operation across fewer VIGOR platforms.
Speaker 7: Well, the current crisis of confidence in the banking system will certainly drive more businesses to alternative solutions that offer greater transparency.
Speaker 7: 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,
Speaker 7: Regulatory support.
Speaker 7: 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 payments, credit, debit, ACH, checks, and other financial information,
Speaker 7: Yes, even lockbox capabilities and wires.
Speaker 7: and robust security and compliance. Passport's self-directed account opening process only needs an email for customers to get started.
Speaker 7: Our FAST KYC and AML process can set up an account in less than 30 minutes.
Speaker 7: In fact, during the weekend of the SVB and signature failures,
Speaker 7: New account setup time averaged seven minutes.
Speaker 7: Once established, customers can set up their own virtual accounts near instantly.
Speaker 7: Importantly, as a licensed money transmitter regulated by FinCEN and all states, we are
Speaker 7: The funds and passport are syndicated to our partner banking institutions and maintained in fully routable FDIC insured accounts.
Speaker 7: Albert Einstein famously said that in the midst of every crisis lies great opportunity.
Speaker 7: We're confident that we have prepared well for the present turmoil in the banking system and will emerge even stronger.
Speaker 7: just as we did following the height of the COVID pandemic and the recent pressures from inflation and economic downturn.
Speaker 7: As many of our peers reduce investment in the wake of worrisome macroeconomic conditions and the igniting banking system fears, we remain confident in our investments into the convergence of payments and banking and even more keenly focused on our execution.
Speaker 7: We're positioned to benefit from opportunities emerging from the current uncertainty by providing transparent and secure unified commerce solutions that today's businesses need.
Speaker 6: In closing.
Speaker 7: I want to acknowledge my passionate colleagues at Priority who are fully committed to our mission and continue to deliver market leading results.
Speaker 7: Thank you for your unwavering focus and the exceptional work you continue to deliver day in and day out.
Speaker 7: There's no power greater than human passion and your passion to deliver great products and customer experience is the power that's driving priority.
Speaker 7: We appreciate you all taking the time to participate in today's call and the ongoing support of our investors and analysts.
Speaker 7: Operator, we'd now like to open the call for questions.
Speaker 2: We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys.
Speaker 2: To withdraw your question, please press star then two. The first question is from Brian Kinslinger of Alliance Global Partners. Please go ahead.
Speaker 3: Hi, guys. Thanks for taking all my questions and thanks for all the details on Unified Commerce Platform. I believe that's what I've been calling the Banking as a Service platform. So I'm assuming that's right. Can we talk about what you have seen recently, what you've looked for during theokémon space, the now wraparound space.
Speaker 3: Has this product launched? You talked about it was imminent as of last quarter. How has early adoption gone outside the initial beta customer? And then what's the customer acquisition process or this new platform offering?
Speaker 7: Yeah sure Brian , I mean look so far you know it's
Speaker 7: It's been all smooth. You know, 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.
Speaker 7: you know, and focused on having that launched more fully on the latter part of May and June into, you know, just a broad base into the SMB acquiring segment.
Speaker 7: 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.
Speaker 7: You know, it's been a really good test, quite honestly, because of the recent
Speaker 7: turmoil in the banking sector.
Speaker 7: Just to give you a couple of examples, kind of stated there, we had a lot of folks who were just needed to get accounts set up and move funds out of SEB or Signature. They were average set up time for them to get established, do all KYC, AML checks.
Speaker 7: get them permission with credentials was seven minutes. So, you know, it's pretty.
Speaker 7: get them permission with credentials was seven minutes. So, you know, it's pretty, I don't know.
Speaker 7: I don't know how many platforms are equipped to operate at that level.
Speaker 7: folks that chose instead of, let's say, setting up physical accounts through our portal.
Speaker 7: would do it through the API and we're integrating
Speaker 7: to our API for all of their payment operations, and these were you know multi-billion dollar players in 48 hours.
Speaker 7: they were set up and testing transactions.
Speaker 7: and moving volume. So it's ready for prime time. It has got a robust pipeline of
Speaker 7: enterprise partners either integrated or already or in the process of integrating and it's a fast process.
Speaker 8: as it relates to those banks signature and SBB that had challenges and you had companies that were able to set up in seven minutes.
Speaker 8: Were those customers that were already familiar and working in your backlog or how did they become familiar with to move so quickly?
Speaker 7: I mean, they were relationships that...
Speaker 7: were familiar to us, were familiar with what we're doing, but they were not existing customers.
Speaker 4: All right. And then – So,
Speaker 8: Switching gears to CPX, I think you were clear that you expect growth this year and you could have had 9% growth.
Speaker 8: But I, at least from how I personally expected it, I thought it would be growing faster over the years.
Speaker 8: Maybe talk about what's going on there in terms of onboarding business payments volume. What if any is a bottleneck and how should investors think about this?
and when it might become much larger scale.
Sure. Look at the...
We saw very good wallet share growth or if you think of like growth and existing logos
during the last couple of years. So sales that had been made, folks had been on the platform, you know, did more volume, which you know, which was great and anticipated. Where we've seen slower sales cycle is harvesting some of the relationships that we've already...
you know, set up Premier Healthcare, for instance, and you know, their GPO.
Premier Healthcare, for instance, and you know, their GPO.
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 due to technology so much as due to, you know, we've got to break through some of the inertia.
those implementation and sales cycles have been longer than certainly we're satisfied with. And that's not due to technology so much as due to, you know, 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 three new salespeople. So we've been expanding sales.
And, you know, we...
we felt we needed to put some a few more
we felt we needed to put some, a few more technological components in place.
so that salespeople could be highly effective. You know, 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. 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.
information, upload them into our system, take all the information they have on their W9 and run AML and KYC checks.
minutes, right? That's a vastly different experience going out the cell than, you know, 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...
we were very optimistic about the success of those selling efforts with this platform being available broadly in B2B.
Just quickly on merchant acquiring, I think I heard the comments, but just to be clear,
to date in the first quarter the trends you have seen in the last two to three years or even longer of merchant acquiring Are generally unchanged is that right? That's correct now we've seen we've seen strong volumes Through the first you know two full months of the the quarter and expect that it'll continue through the balance here
And then as you become much larger, it might take more merchants to sustain the growth.
Are you making investments on the sales side? You know what do you do to? You know eventually have to accelerate the number of merchant acquired emergency requiring
Well, you know, a couple 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 slash banking into this segment.
We don't need to...
need to invest it.
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...
We'll have a passport account.
You know, call within the next month to six weeks. So that account will be there. Now it just needs to be activated. Okay? Yeah.
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'll get your money in five 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 the 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 cost.
If you sweep it to an external account, there'll be a fee. Right, see these are things that they're, look they're what businesses need.
and 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, you know, we think a pretty high value add, particularly since that money is in an FDIC insured routable account.
transparent, which we have, is going to be, we think, a pretty high value add, particularly since that money is in an FDIC insured routable account.
So that's just one example. And of course we'll keep building on from there, you know, the ability to borrow funds, you know, from approved lenders.
through that account and a host of other things that, again, just become additive to margin without us having to...
to do a whole lot. So, I think that's the future of SMB acquiring. These things need to happen in one place. We're positioned to make that happen. The investments have already been made. They've been made very profitably, as you can see from our overall performance.
And now we have an opportunity to...
both ourselves and with our distribution partners, you know, provide more services which should, you know, lead to wallet share
you know, profitability per merchant, growth in that segment. So I would say that's really phase one. The other area where we're just winning.
And you can see this in the trends of our merchant boards. We're consistently at or above 5,000 new merchant boards a month. Well, that's because we have a lot of new boarding partners.
Because what they're realizing is, hey, my merchants are just, my merchant portfolio is just worth more at priority.
hey, my merchants are just, my merchant portfolio is just worth more at priority. They have better tools.
more software-based tools that are specific to the verticals that I'm serving, whether that's...
Yep.
So health care.
Real estate, hospitality, salons, retail trade.
We have very tailored vertical softwares for these business lines.
So merchants stick around longer, and now you start adding the ability to inject
ways for them to enrich their portfolio value with
fees from banking services.
their merchant portfolio is just worth more at priority. So they see that and
We drive more, reseller partners. That is what's happening right now Brian .
Two numbers questions you highlighted. Salary and benefits up 41% obviously faster than revenue growth.
Do I assume from the adjusted EBA guidance that that term 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?
Sure, yeah, so Brian on the salary and benefits side, so as I mentioned on the call, you know, 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 dollars of an increase.
We're going to continue to really keep those salary benefits levels where they finished out the year. So I think you'll see growth there at a much lower rate than the top line is we want more and more of that growth to flow 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. And then on the interest expense? Yes, on the interest expense, obviously our debt today is all floating rate, 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 the Fed is, we're going to be looking at the
you know, 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. So with the rising rates, we've gotten the benefit of interest income off of the float. 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 head standpoint. And if you think about each quarter point of increase in rates, that's about 350,000 per quarter of additional interest income. Right, so obviously you 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. Great, thank you. Again, if you have a question, please press star then 1. The next question comes from Matthew Hollett with B. Riley. Please go ahead.
Oh hey guys thanks for taking my question. Just what the what the margin guidance I mean did you did you say it contemplates the enterprise even running where it was in the fourth quarter about 90% and if so I mean what I'm not trying to get 20 you know for guidance out of you but why wouldn't that margin as that kicks in continue to
just accelerates, just sort of company-wise. Something where you can give us, so what's, is 23 sort of a transitional year? Are you holding back some upside with some rollouts? Just get into more of that margin guidance and the enterprise part of the segment. Yeah, no happy to, Matt. I appreciate you joining the call. So I think there's a couple factors there that.
work against each other. 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 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 high residual. So those two 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. Appreciate that. Let me ask something. What do you see the long-term margins of the company, you know, when you get really ramped with the banking as a service product, the enterprise, you know, more merchants adopted? What's?
How do investors look at it? It sounds like the high 30 plus percent is going to be held back a bit because of the SMB side a bit, but looking longer term, is there any reason not to think that margin could be 40, 50 percent? We are... We are going to have to look at the high 30 plus percent, because of the SMB side a bit, but looking longer term, is there any reason not to think that margin could be 40, 50 percent?
we're taking a judicious approach and you're, you know, kind of from your mouth to God's ears, you know, if you will, because we'll have better clarity on the impact as we
see the adoption within those two segments. But to your observation, that all just flows to the bottom line.
So, you know, if we're making, you know, call it an extra, you know, 10, 15 dollars per month per merchant because they're using, you know, banking services where, you know, funds are making it to their passport account and they're spending on a debit card that, you know, generates interchange.
that we're collecting as the issuer, that's going to change the dynamic of the profitability per merchant. 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, you know, as that occurs, we'll have a better
very analytically driven answer to your question because it will
we'll have metrics. It'll move beyond, you know, I'll say it.
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. No, I appreciate that. Just, you know, you sort of confirmed that margins look like they just explode at some point when.
people are on and would you look at signing up new.
new card companies, new debt settlement people. I'm just going to get the update on the CFP pay where that's going.
Sure. So look, I'll put it in relative terms. If you were to look at trends within, you know, I'll call it consumer wellness.
Sure, so look, I'll put it in relative terms. If you were to look at trends within, I'll call it consumer wellness, prior to the pandemic,
or let's say at the outset of COVID.
the boarding trends of consumers move into a consumer wellness program.
basically help them consolidate that, help them negotiate resolutions to debt.
help them consolidate that, help them negotiate resolutions to debt. It's doubled.
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 you know it's a pretty healthy rate. And you know look just being very candid about the segment we are...
There's incremental upside for sure, but you know it's a pretty healthy rate. And you know 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 are just not.
They're not potential customers for us because of the their distribution models. So I think you'll see modest but some kind of logo growth. But you know 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.
leveraging our banking as a service technology. They tend to be the winners over time, so we see the growth from those partners. I really appreciate it. Thank you.
Of course, thank you. This concludes our question and answer session. I would like to turn the conference back over to Tom Priori 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...
Well, I 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.
You know, we are built for these times. And we're very excited about what the future holds, you know, particularly given some of the dislocation that we're seeing in, you know, not just aspects of the economy that we think we can be a better solution provider to businesses in need. But also the...
the growing opportunity that the transitional nature of the banking industry that we're gonna see probably in the next year that we can capitalize on. It's why we built the platform we did and now we wanna 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 is now concluded. Thank you for attending today's presentation. You may now disconnect.
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Good morning and welcome to the Priority Technology Holdings 4th Quarter and Full Year 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. For today's presentation, there will be an opportunity to ask questions.
To ask a question, you may press star then one on your touch tone phone. To withdraw from the question to you, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Chris Kettman. Please go ahead. Chris Kettman, please press star then one on your touch tone.
Good morning, and thank you for joining us. With me today are Tom Priori, Chairman and Chief Executive Officer of Priority Technology Holding 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 project it into 2023. First and foremost, the business is performing the way we anticipated. Consistently growing market share and 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 counter-cyclical business lines that were 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 traits and margin expansion are representative of the first quarter trends we have seen to date in 2023.
year 2022 growth traits and margin expansion are representative of the first quarter trends we have seen to date in 2023. Let's take a look at the trends we have seen to date in 2023.
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 crisis 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 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 million.
which led to a 25% increase in gross profit to $61 million and a 21% improvement in adjusted EBITDA to $39.8 million. For the year, revenue increased 29% to $664 million, growing organically by 23% in the fourth quarter.
and 19.1% in 2022.
Full year adjusted gross profit and EBITDA both grew 46%, with adjusted gross profit reaching $226.9 million and adjusted EBITDA coming in within our target at $140.3 million for the full year 2022.
Adjusted gross margin of 34.2% increased 410 basis points from 2021, demonstrating the operating leverage of our purpose-built platform.
As I earlier noted, we anticipate that our strong fourth quarter performance and established trends in our business channels will continue. As such, we are expecting to deliver consistent double digit top line and bottom line growth among other projects includingalds.com, statementp i and toweringdrinks streak k g hunting industrialized service Fo U tv
projecting revenue of $740 to $755 million and adjusted EBITDA of $160 to $165 million for the full year 2023. For those of you who are new to the company, slide 7 highlights the architecture of our proprietary EBITDA.
unified commerce platform that is purpose-built to collect, store, and send money, combining robust payments and banking functionality to monetize the merchant networks we serve. Our customers and the current market conditions continue to reinforce our belief that systems are combining features of both payment and
and banking to accelerate cash flow and distribute funds to multi-party environments will be critical as businesses put greater demands on software and payment solution providers. We are committed to meeting their growing demand by simplifying the customer experience for our partners and making working with priority as easy as 1-2-3.
Partners simply choose the application that best fits their business, whether that is a small business operator choosing from MX Merchant and the MX POS suite.
an FI or a middle market customer adopting CPX for automated payables, or an enterprise partner connecting to us.
via our API, they select the passport financial tools that best fit their needs and begin to move money.
At this point, I'd like to hand it over to Tim, who will provide further insight into our segment level performance during the fourth quarter and full year.
along with current trends in each that inform our guidance for the upcoming year. 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 mDNA is included in the Form 10K that was followed with the SEC this morning and provides a discussion of our comparative full year results.
A link to that filing can also be found on our website. As Tom mentioned, we have 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 bank card dollar volume across all segments to roughly $62 billion.
We had 10.5% growth in bank card 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 in each of the business segment's results for the fourth quarter. Let's start with S&B 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 bank card dollar volume to roughly $14.9 billion.
which included 9% growth in bank card transaction count and was slightly offset by a decline in average ticket size to $92.61 from just over $94 in the fourth quarter of 2021.
We finished the quarter with 259,000 merchants, which represents an increase of 7% from the prior year.
The average merchant count for the quarter was just over 257,000, which was also 7% growth from Q4 of 2021. This growth in merchant count was driven by continued strong boarding trends where new monthly merchant boards averaged 4,600 per month throughout the quarter. That compares to an average of 3,600 per month in the fourth quarter of 2021.
120 basis point decrease in adjusted gross profit margins.
As discussed on prior calls, we've continued to see some margin compression across the acquiring portfolio as a result of our larger reseller partners driving more of the growth, but those partners also generally receive higher residual commissions.
on prior calls, we've continued to see some margin compression across the acquiring portfolio as a result of our larger reseller partners driving more of the growth, but those partners also generally receive higher residual commissions. Lastly, for SMB,
Quarterly operating income increased by 42% to almost $15 million as a result of operating leverage within the business segment. Moving to B2B payments, we had revenue of $2.8 million in the fourth quarter of 2022, which was a decrease of 48% for the fourth quarter of 2021.
This decrease was the result of the previously discussed reduction in revenue from managed services due to the final wind down of certain programs with a large customer. To help put that wind down in context, managed services generated on average over 2.7M dollars of quarterly revenue in the first half of 2022.
That compares to just over $300,000 in the fourth quarter as the program completed its wind down in October . Going forward, we expect to see a nominal amount of managed services revenue that will be generated by some smaller legacy programs.
Focusing on the CPX business within B2B, revenue for the quarter was relatively flat at $2.5 million, but it was negatively impacted due to the timing of certain incentives.
Normalizing for that, CPX would have grown almost 9% in the quarter. The growth in CPX was fueled by just under 8% growth in ACH volume from Q4 of 2021 to Q4 in 2022 and 11% growth in issuing volume.
Normalizing for that, CPX would have grown almost 9% in the quarter. The growth in CPX was fueled by just under 8% growth in ACH volume from Q4 of 2021 to Q4 in 2022 and 11% growth in issuing volume. With respect to B2B's profitability on slide 13, CPX has grown by almost 10% from Q4 of 2021 to Q4 in 2017. With respect to B2B's sustainability on slide 14, CPX has grown by almost 9% from Q4 of 2018 to Q4 of 2017. With respect to B2B's sustainability on slide 14,
Adjusted gross profit declined by 35% as a result of the managed services wind down, but you can also see how the adjusted gross profit margin increased by over 12 percentage points during the quarter as the lower margin managed services business rolled off.
For the quarter, the B2B segment had an operating loss of $1.1 million, as certain costs related to the Managed Services Program weren't able to be fully removed from the P&L and Q4, but have since been reduced. Moving to the Enterprise segment on the next page.
Q4 revenue of $24.9 million was an increase of $7.7 million, or 46% from $17.1 million in Q4 of 2021.
As a reminder, CFT pay was acquired in September of 2021, so the strong year-over-year growth in Q4 is entirely organic and not the result of any grow-over from the acquisition timing.
Favorable trends in new enrollments and increase in the number of billed clients and the benefit of rising interest rates all contributed to the fourth quarter revenue growth.
I would also highlight that the Q4 performance represents almost 15% sequential growth from the third quarter of 2022.
As shown on the next page, adjusted gross profit for the enterprise segment increased by 50% to $23.3 million and adjusted gross profit margins expanded by 300 basis points to 93.6%. Operating income for this segment also benefited from operating leverage as exemplified by its 121% growth compared to revenue growth of 46%.
We remain excited by the revenue and earnings opportunities inherent in the Enterprise Segment going forward. Operating expenses are shown on page 16 and totaled $42.8 million for the quarter, an increase of 20% from the prior year.
This change is primarily driven by increased expenses in the business resulting from investments made in both personnel and technology to support the strong growth experienced in 2022. Salaries and benefits of $16.9 million increased 41% from Q4 2021 as a result of both an increase in headcount and wage increases.
which is consistent with industry and broader macro trends. The headcount increases supported growth across the company and were added in both the US and in our development center in India. We finished Q4 with approximately 870 employees, including roughly 300 in India, compared to just under 800 at the end of 2021.
I do want to highlight that the $16.9 million of salaries and benefits in Q4 was only a modest increase from $16.4 million in Q3 as we remain focused on extracting operating leverage from the investments that have been made to date in both the team and technology. SG&A of $7.9 million increased 27%,
from $6.2 million in Q4 2021. Again, continued investment in the business expansion drove that level of growth, but consistent with my comments on salaries and benefits, we will continue to focus on our cost structure in order to drive operating efficiencies.
I would highlight that the Q4 spend was almost $3 million lower than Q3 levels due to the roll off of certain non-recurring expenses combined with lower marketing expenses following the priority power conference that we hosted in September . Appreciation and amortization of $18 million for the quarter increased modestly from the last year.
Moving to the next slide, adjusted EBITDA for the quarter was $39.8 million, which was an increase of 21% from $32.9 million in Q4 of 2021. Working down the EBITDA walk on this slide, I'll start with Q4, but also discuss the full year results.
The largest items added back to consolidated net income are obviously interest expense and depreciation and amortization. Interest expense of $16.3 million for the quarter is an increase of $4.4 million from Q4 2021 levels given the impact of the rising interest rate environment and the floating rate nature of our existing debt. On that topic, I would reiterate from prior calls.
that we do have a natural hedge in place for almost 90% of the floating rate debt. Given the interest income, we were able to generate on the deposits in the enterprise segment.
you include the floating rate component of our preferred stock the natural hedge from the deposits cover about 60% of our floating rate liabilities.
The further adjustments to arrive at adjusted EBITDA for Q4 include non-cash stock compensation of $2 million and approximately $1.3 million of other adjustments which consist of certain non-cash or non-recurring expenses. For the full year, adjusted EBITDA of $140.3 million includes an add back of $53.5 million for interest expense, $6.2 million of non-cash stock compensation expense, and $2.3 million for interest expense.
and $6.7 million of other non-cash or non-recurring expenses. Moving to the outstanding debt slide on page 18, you'll note that our debt levels declined year over year, and we finished the quarter with $623.2 million of gross debt and $604.7 million of net debt. This reduction is net of continued investments in the business and also after repurchasing $1.7 million of PRTH shares during the fourth quarter and $5.9 million during the full year.
From a liquidity standpoint, we had $27.5 million of borrowing capacity under a revolving credit facility, in addition to $18.5 million of unrestricted cash on the balance sheet at quarter end.
I would also note that subsequent to Q4's quarter end, we've paid down another $6 million on the revolver. On slide 19, the preferred stock on our balance sheet totaled $235.6 million at December 31st and is net of $21.1 million of unaccredited discounts and issuance costs.
The fourth quarter preferred dividend of $10.5 million is comprised of $5.3 million paid in cash and $4.3 million of a PIC component. That is supplemented on our income statement with the accretion of discounts and issuance costs of just over $800,000. Before turning the call back over to Tom, I wanted to further address our revenue and adjusted EBITDA guidance for the full year of 2023, which can be found on slide 20 in the presentation.
Based on continued strong growth and trends in the business, we are forecasting 12 to 14 percent growth in revenue to a range of $740 to $755 million for the year. As I mentioned previously on the call, we are focused on leveraging the investments already made in the team and technology throughout 2022, which should lead to overall margin expansion during 2023. As a result, we are forecasting adjusted EBITDA growth of 14 to 18 percent, N
will be skewed by having an anniversary of the runoff from managed services.
but we expect CPX to show continued growth that should also result in margin expansion for the segment given the higher margin profile of CPX compared to managed services. Lastly, Enterprise is forecasting continuous strong growth, although we have tempered expectations a bit throughout 2023, to account for the growth already experienced in the second half of 2022.
Further, we expect the margin profile in the enterprise segment to remain consistent with its exit rate from 2022. With that, I'd now like to turn the call back over to Tom for his closing comments.
profile in the enterprise segment to remain consistent with its exit rate from 2022. With that, I'd now like to turn the call back over to Tom for his closing comments. 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 on 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 speed Diepan.
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 account.
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 VIGOR platforms. They can choose high volume self-service model or a higher touch operation across fewer VIGOR
Well, the current crisis of confidence in the banking system will certainly drive more businesses to alternative solutions that offer greater transparency.
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, quality of life, Klara knowing less knowledge, is excited to say a strong payment system for our business.
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 payments, credit, debit, ACH, checks, yes, even lockbox capabilities, and wires.
and robust security and compliance.
Passport's self-directed account opening process only needs an email for customers to get started. Our FAST KYC and AML process can set up an account in less than 30 minutes.
Passport's self-directed account opening process only needs an email for customers to get started. Our FAST KYC and AML process can set up an account in less than 30 minutes. In fact, during the weekend of the...
SVB and signature failures, new account setup time averaged seven minutes. Once established, customers can set up their own virtual accounts near instantly. Importantly, as a licensed money transmitter regulated by FinCEN and All States, the funds and passport are syndicated to our partner banking institutions.
and maintained in fully routable FDIC insured accounts. Albert Einstein famously said that in the midst of every crisis lies great opportunity. We're confident that we have prepared well for the present turmoil in the banking system and will emerge even stronger. Just as we did following the height of the COVID pandemic, we've moved on to the next "#BY
and the recent pressures from inflation and economic downturn. As many of our peers reduce investment in the wake of worrisome macroeconomic conditions and the igniting banking system fears, we remain confident in our investments into the convergence of payments and banking and even more keenly focused on our execution. We're positioned to benefit from opportunities emerging from the current uncertainty.
and the exceptional work you continue to deliver day in and day out.
There's no power greater than human passion and your passion to deliver great products and customer experience is the power that's driving priority.
We appreciate you all taking the time to participate in today's call and the ongoing support of our investors and analysts.
Operator, we now like to open the call for questions. We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two.
The first question is from Brian Kinzlinger of Alliance Global Partners. Please go ahead.
Hi guys, thanks for taking all my questions and thanks for all the details on the Unified Commerce 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…
Has this product launched? You talked about it was imminent as of last quarter. How has early adoption gone outside the initial beta customer? And then what's the customer acquisition process for this?
new platform offering. Yeah, sure Brian . I mean look, so far you know it's
It's been all smooth. You know, 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.
you know, and focused on on having that launched more fully on the latter part of May and June into, you know, 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 give you a couple examples.
you know, kind of stated there. We had a lot of folks who were, you know, just needed to get accounts set up and move funds out of SEB or Signature and you know, they were average setup time for them to get established, do all KYC, AML checks.
get them permission with credentials was seven minutes. So, you know, 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 you know multi-billion dollar players in 48 hours.
they were set up and testing transactions and moving volume. So it's ready for prime time. It has 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 start in seven minutes.
Were those customers that were already familiar and working in your backlog or how did they become familiar with to move so quickly? I mean they they we they were they were relationships that were familiar to us were
We're familiar with what we're doing, but they were not existing customers. 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 it, 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 a bottleneck and how should investors think about this and when it might become much larger scale? Sure. Scott, I'll interject in the
We saw very good wallet share growth, or if you think of 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 you know set up. Premier Healthcare for instance and you know their GPO.
slower sales cycle is harvesting some of the relationships that we've already set up. Premier Health Care for instance and their GPO.
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 a...
It's not due to technology so much as due to, we've got to break through some of the inertia at the customer level. Then look, the other thing we've done is we just brought in three new salespeople. So we've been expanding sales. We felt we needed to put some
much as due to, you know, 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 three 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. I mean, think about the experience of a buyer and your supplier network, and you can permission supplier wallets or call it supplier accounts on passport instantly. 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. That's a vastly different experience going out the cell 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 in B2B. Just quickly on merchant acquiring, I think I heard the comments, but just to be clear, to date in the first quarter, the trends you have seen in the last two to three years or even longer of merchant acquiring are generally unchanged. Is that right? That's correct. Now we've seen strong volumes through the first two full months of the quarter and expect that it will continue through the balance year.
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 merchants you're acquiring? Well, you know, a couple 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 and banking into this segment.
we'll start rolling out embedded finance slash banking into this segment. All 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.
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.
You know, call within the next month to six weeks. So that account will be there. Now it just needs to be activated. OK? As it gets activated, we'll offer them the ability to receive funds instantly.
what we call Fund in Five. If you're processing on our gateway, as soon as you authorize transactions and you elect to have instant funding, you'll get your money in five 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 the 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 cost. If you sweep it to an external account, there'll be a fee.
Right, see these are things that they're, look they're what businesses need and in this particular, particularly in this environment, they want cash acceleration, they want transparency and you know I would submit to you given the current banking environment having modern reporting that's clear and transparent which we have.
from approved lenders.
through that account and a host of other things that, again, just become additive to margin without us having to...
to do a whole lot. So, you know, I think that's the future of SMB acquiring is these things need to happen in one place. We're positioned to make that happen. The investments have already been made. They've been made very profitably, as you can see, you know, from our from our overall performance. And now we have an opportunity to
both ourselves and with our distribution partners, provide more services which should lead to wallet share growth.
you know, profitability per merchant, growth in that segment. So I would say that's really phase one. The other area where we're just winning, and you can see this in the trends of our merchant boards. We're consistently at above 5,000 new merchant boards a month. Well, that's because we have a lot of new boarding partners.
Because what they're realizing is, hey, my merchants are just, my merchant portfolio is just worth more at priority. They have better tools. They have more software based tools that are specific to the verticals that I'm serving, whether that's...
Yeah. Health care, real estate, hospitality, salons, retail trade.
We have very tailored vertical softwares for these business lines.
So merchants stick around longer, and now you start adding the ability to inject
longer. And now you start adding the ability to inject ways for them to
enrich their portfolio value with fees from banking services, their merchant portfolio is just worth more at priority. So they see that and we drive more reseller partners. I mean that is what's happening right now Brian .
Great. Two numbers of questions. You highlighted salary and benefits at 41%, obviously faster than revenue growth. Do I assume from the adjusted NEBA 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? Sure, yeah so Brian on the salary and benefits side, so as I mentioned on the call, you know 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. That was pretty modest, only about $500,000 of an increase. We're going to continue to really keep those salary and benefits 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 flow 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. And then on the interest expense.
Yes, on the interest expense, obviously our debt today is all floating rate. 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.
So with the rising rates, we've gotten the benefit of interest income off of the float. 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 head standpoint. If you think about each quarter point of increase in rates, that's about 350,000 per quarter of additional interest income.
Oh, hey guys, thanks for taking my question. Just what the, what the margin guidance, I mean, did you, did you say it contemplates the enterprise running rare was in the fourth quarter, about 90% and if so, I mean, what, I mean, I'm not trying to get 20, you know, uh, for guidance out of you, but why wouldn't that margin as that kicks in continue to just accelerate? It's just sort of what, you know, company-wise, something where you can give us sort of what's the 23 sort of a transitional year, are you holding back?
some upside with some rollouts. Just get into more of that margin guidance and the enterprise part of the segment. Yeah, no, happy to, Matt. I appreciate you joining the call. So I think there's a couple factors there that.
work against each other. 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 problems.
And then offsetting that is some of the margin compression we continue to expect within the SMB portfolio. 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 residual. So those two offset and then obviously B2B managed services rolling off is a gross profit dollar.
is adopted.
How do investors look at it? It sounds like the high 30 plus percent is going to be held back a bit because of the SMB side a bit, but looking longer term, is there any reason not to think that margin could be 40, 50 percent? Yeah. Look, we're taking a judicious approach. And your debate, your
you know, 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 two segments. Marcusolia One, Two, Three, start Are you ready to share with us? Francis First of all, thanks for inviting me to be here all night. Marcusolia on behalf of everyone for their love for hanging out with us andumbled Merc holistic have reallyEEEEEEE delicious.
to your observation, right, that all just flows to the bottom line. So, if we're making, call it an extra 10, 15 dollars per month per merchant because they're using banking services where funds are making it to their passport account and they're spending on a debit card that generates interchange that we're collecting as the issuer.
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.
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.
as that occurs, we'll have a better, very analytically driven answer to your question, because it will have metrics. It'll 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.
No, I appreciate that. You sort of confirmed that margins look like they just explode at some point when the enterprise payment really kicks in. 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 the CFT pay? I'm sorry if I missed it, but in terms of what people are on and what you looked at.
signing up new card companies, new data settlement people. I'm just, any update on the CFP pay and where that's going? Sure, so look, 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. Then I get a double.
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 you know, it's a pretty healthy rate and you know, look, just being very candid about the segment, we are
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 you know, it's a pretty healthy rate and you know, look just being very candid about the segment, we are 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's certain participants in the space that they're just not potential customers for us because of the 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. I really appreciate it. Thank you. Of course, thank you. This concludes our question and answer session. I would like to turn the conference back over to Tom Priori for closing remarks.
so we see the growth from those partners. I really appreciate it. Thank you. Of course. Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Tom Priori for closing remarks. All right. Well, there's aReturn.
from those partners. I really appreciate it. Thank you. Of course. Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Tom Priori for closing remarks. All right. Well, thank you very much.
I 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…transitional nature of…
of the banking industry that we're going to see, you know, probably in the next year that, you know, that we can capitalize on. It's why we built the 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 is now concluded. Thank you for attending today's presentation. You may now disconnect.