Q4 2024 Priority Technology Holdings Inc Earnings Call
Brian Kinstlinger, Clark Orsky, Thomas Priore, Chris Kettmann
Speaker Change: Brian Kinstlinger, Clark Orsky, Thomas Priore
Speaker Change: Good morning and welcome to the Gravity Technology 4th quarter, 2024 conference call.
Speaker Change: 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. To ask a question, you may press stars than one on your touch-to-end phone. To withdraw your question, please press stars than two.
Please note, this event is being recorded.
Speaker Change: I would now like to turn the conference over to Chris Kettmann. Please go ahead.
Chris Kettmann: Good morning and thank you for joining us. With me today are Tom Priore, Chairman and Chief Executive Officer of Priority Technology Holding and Tim OLeary, Chief Financial Officer.
Speaker Change: Before giving our prepared remarks, I would like to remind all participants that are comments today will include forward booking statements which involve a number of risks and uncertainties that may cause actual results that differ materially from our forward booking statement.
Speaker Change: 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 filing and we encourage you to review these filings.
Speaker Change: Additionally, we may refer to non-GAAP measures , including but not limited to EBITDA and adjusted EBITDA during the call. Reconciliation 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 Change: With that, I would like to turn the call over to our chairman and CEO , Tom Priore.
Tom Priore: Thank you, Chris. And thanks to everyone for joining us for our fourth quarter, 2024 Earnings Calls.
and Chris Kettmann. Thank you. Thank you.
Tom Priore: I'd like to begin today's call by discussing the culmination of our consistently strong full-year performance that informs our aggregate revenue and adjusted EBITDA guidance for 2025.
Tom Priore: I will then highlight our excellent Q4 results before handing it over to Tim who will provide segment-level performance and key trends in developments within each of our business segments and priority overall.
Please see the complete disclaimer at https://sites.google.com
Tom Priore: In this morning's press release, we're excited to report the strongest revenue performance in our history.
Both for the fourth quarter and the full year.
Tom Priore: Summarized on Slide 3, Priority had an outstanding year by every key financial metric.
Growing Net Revenue by 16% [inaudible]
Tom Priore: generating adjusted gross profit and EBITDA growth of 19% and 21% respectively and improving operating income by 19% for the full year 2024.
Tom Priore: We ended the year with approximately 1.2 million total customer accounts operating on our commerce platform, processing over 130 billion in annual transaction volume during the prior 12 months while administrating over 1.2 billion in average daily account balances.
Tom Priore: Tim will walk through the full year 2025 guidance specifics later in the call.
Tom Priore: But I can reflect that the value of our diverse partners and customers see.
Tom Priore: In our Unified Commerce platform and elegant product solutions provides confidence that we'll sustain the momentum in our acquiring, payables, and enterprise segments.
Tom Priore: We anticipate comfortably achieving 10-14% top-line revenue growth to a range of $965 million
and Generating
Despite likely headwinds related to lower interest rates,
A somewhat murky macroeconomic environment.
Tom Priore: and the migration of some technology resources from a CAP-X to OPEX treatment.
Tom Priore: Our unified commerce platform that streamlines collecting, storing, lending and sending money with solutions for acquiring, payables and banking, and creates revenue and operational success for businesses, continues to resonate with our partners and customers.
which is reflecting in our organic growth performance.
Tom Priore: Turning our attention to our Q4 results, noted on slide 4.
Tom Priore: Revenue of 227.1 million increased by more than 14% from the prior year.
Tom Priore: This led to a 15% increase in adjusted gross profit to 83.9 million.
and a 16% improvement in Adjustity Bada to 51.7 million.
Tom Priore: Adjusted Gross Profit, Margin of 37% increased 40 basis points from the prior year's quarter.
Go to Beadaholique.com for all of your beading supply needs!
Speaker Change: Having now sunset the impact of the Plastic Acquisition during Q3 of 2024 on our financials.
Our Q4 performance represents purely organic growth.
I'm not sure if I'm right. I'm not sure if I'm right. I'm not sure if I'm right.
The Strong Closing Quarter
Speaker Change: Contributed to the previously noted 16% revenue growth to 879.7 million.
A 19% adjusted gross profit increase to 328.1 million.
Speaker Change: and a 21% improvement in adjusted EBITDA to 204.3 million on the strength of a 90 basis point expansion in adjusted gross profit margin to 37.3% as highlighted on slide 5.
Speaker Change: For those of you who are new to the company, Flight 6 highlights Priority's vision for unified commerce.
Speaker Change: and the value proposition we bring to the market that empowers businesses to leverage our flexible financial toolset, whether through our apps.
Speaker Change: or API Connection to Accelerate, Cash Low, and Optimize Working Capital.
Speaker Change: Priority Commerce Engine is purpose-built to streamline collecting, storing, lending and sending money to our acquiring payables and banking and treasury solutions.
Speaker Change: Our customers and current market conditions reinforce our belief that systems facilitating payments and banking to accept and distribute funds in multi-party environments will be critical as businesses put greater demands on software.
Speaker Change: and Payment Solution Providers to unlock value in existing and developing channels.
Speaker Change: We're committed to meeting our customers where they are by refining the experience for our partners to make working with priority seamless and easy.
Speaker Change: Our financial performance demonstrates that partners consistently choose unified commerce applications
Speaker Change: Inocquiring Pables and Banking that best fit their business or connect to our API to leverage these features in their own applications.
Speaker Change: We remain intently focused on the continued innovation of our SaaS payments and banking solutions.
that are powered by priority commerce.
Speaker Change: and are eager to meet the evolving needs of our growing portfolio of customers and enterprise partners.
Speaker Change: I would encourage you to play the short 1-2-minute videos embedded in the product links on 5-6 to gain a full appreciation for their value and how they are being reflected in our growing customer base.
Speaker Change: At this point, I'd like to hand it over to Tim who will provide further insights into our segment level performance during the quarter, along with current trends in each that factored into our confidence for sustained momentum in 2025.
Thank you, Tom. Good morning, everyone.
Tim OLeary: As Tom mentioned, we had strong financial performance across the business in the fourth quarter and for the full year.
Tim OLeary: For the full year, reported revenue growth of 16.4% compares to 17.1% of organic growth. If you exclude the impact of the grow over from the partial year of plastic in 2023, combine with the large reseller diversification effort in the first half of 2023.
Tim OLeary: Adjusted Gross Profit Growth of 19.2%, Included 17.6% Organic Growth, and Adjusted Evidia Growth of 21.3% Included Organic Growth of 20.6%.
Tim OLeary: So, whether you look at the results on a reported basis or an organic basis, we are proud to deliver another year of excellent results in 2024 for our stakeholders.
Tim OLeary: Adjusted gross profit from our B2B and enterprise segments represented 59% of the total for the year, while for the fourth quarter they combined to represent 62%.
Tim OLeary: Recall that for the full year of 2023, the combined adjusted gross profit of B2B and Enterprise was right at 50% of total.
Tim OLeary: So we've seen an almost 10 percentage point increase in the last 12 months, and we exited 2024 at an even higher mix of profits coming from our higher growth, higher margin B2B and enterprise segments.
Tim OLeary: As a direct result of the growth in these segments, the highly visible and recurring nature of our business model continues to gain momentum as over 63% of adjusted gross profit in Q4 came from recurring revenues that are not dependent on transaction counts or bank
Tim OLeary: The percentage of adjusted growth profit from recurring revenues has nearly doubled since the beginning of 2022.
and Chris Kettmann. We'll be right back. I'm Chris Kettmann.
Tim OLeary: When you combine strong, organic growth with the continued favorable shift in the business mix and the increasingly recurring nature of our profits, along with the diverse revenue streams, including certain counter-circle
Tim OLeary: I'll now move to the second level results for the fourth quarter and start with the S&B segment on slide eight.
Tim OLeary: SMB generated Q4 revenue of $155.7 million, which is $15.5 million or $11.1% higher than the prior year's fourth quarter.
Tim OLeary: Bank Hard Dollar Volume in SMB was 15.5 billion for the quarter, which is up 6.6% from 14.6 billion in the prior year.
Tim OLeary: Total card dollar volume, which includes bank card dollar volume, but also includes debit, gift and loyalty cards, discover and certain amix volume, total 18.1 billion for the quarter, which is up 6.9% from 16.9 billion in Q4 of the prior year.
Tim OLeary: Going forward, we will plan to provide the more comprehensive total card dollar volume figure as a key metric in place of bank card dollar volume.
Tim OLeary: From a merchant standpoint, we averaged over 177,000 accounts during the quarter and new merchant boards averaged 3,750 per month during the period.
Tim OLeary: Adjusted gross profit in SMB for the fourth quarter was 32 million which is up 0.4% from 31.8 million in last year's fourth quarter. The quarter was negatively impacted by the right off of certain obsolete inventory and the maturation of prior portfolio purchases.
Tim OLeary: Gross margins of 20.5% in the quarter are down from 22.7% last year for the same reasons. However, if you were a judge for the impact of the inventory right off, margins would have been relatively flat on the year of your basis.
For more information visit www.FEMA.gov
Tim OLeary: Lastly for SMB, quarterly adjusted EBITDA of 26.6 million represents a 1.6 million or 6.4% increase from 25 million in the prior year's fourth quarter.
Tim OLeary: Growth in adjusted EVTA outpace, adjusted gross profit, as we gained operating leverage through continued expense discipline during the quarter and the full year.
Tim OLeary: Moving to B2B, revenue of 23.7 million was an increase of 2.3 million or 10.9% from the prior year.
Tim OLeary: Plastic contributed 18.9 million of revenue during the quarter up almost 8% from 17.5 million in the prior year, while CPX grew by 1 million or 26% on a year-over-year basis to 4.9 million of revenue in the quarter.
Tim OLeary: Adjusted gross profit in B2B increased to 6.4 million or 24% growth from 5.1 million in the prior year.
Tim OLeary: Q4 gross margins of 26.8% compared to 24% last year as a result of higher gross margins of plastic combined with strong growth in the higher margin CPX product suite.
Tim OLeary: The B2B segment produced 2.4 million of adjusted EBITDA during the quarter, which is a 2 million dollar increase from the prior year, resulting from higher gross profit combined with lower operating expenses on a comparative basis.
Brian Kinstlinger, Chris Kettmann, Tim Switzer
Tim OLeary: Moving to the Enterprise segment, Q4 revenue of 48.7 million was an increase of 10.4 million or 27% from 38.3 million in the prior year.
Tim OLeary: Revenue growth is driven by continued strong enrollment trends, an increase in the number of build clients and CFT pay, and an increase in the number of integrated partners or program managers across the enterprise segment. In addition, higher account balances were able to largely offset the impact of lower interest rates in the fourth quarter.
Tim OLeary: As a result of those factors, adjusted gross profit for the enterprise segment increased by 27% to 45.6 million while adjusted gross profit margins remain relatively constant at 93.6% for the quarter.
Tim OLeary: Adjusted EBITDA was 42 million for the quarter, which is an increase of 27% from 33 million in the prior year.
Moving to consolidated operating expenses on slide 11.
Tim OLeary: salaries and benefits of 23.2 million increased by only 1.5 million or 6.9% from Q4 last year and was driven by the overall growth of the company.
Tim OLeary: We finished the quarter in a year with just over a thousand employees which compares to approximately 980 at the end of 2023.
Tim OLeary: SGNA of 12.89 decreased by 1.3 million from 14.1 million.
Tim OLeary: The year of year decrease was due primarily to the non-recurring restructuring charge in Q4 of 2023 which was partially offset in 2024 by higher software legal and marketing expenses.
Tim OLeary: Moving to the next slide, adjusted EBITDA for the quarter was 51.7 million, which is an increase of 7.1 million or 15.9 percent from 44.6 million in Q4 of 2023.
Tim OLeary: Interest expense of 23.1 million for the quarter increased 2.5 million for the prior year as a result of higher comparative debt levels in the quarter due to the redemption of the preferred stock in 2024.
Moving to the capital structure and liquidity overview on slide 13.
Tim OLeary: That level is during a quarter increased to 945.5 million gross and 886.9 million net, which is driven by the issuance of 115 million of incremental thermal embarromates during the quarter.
Tim OLeary: Proceeds from the issuance were used to redeem the remaining balance of the preferred stock.
Tim OLeary: From a liquidity standpoint, we ended the quarter with all 70 million of borrowing capacity available under our revolver and 58.6 million of undershirt to cash on the balance sheet.
Tim OLeary: For the LTM Period, ending December 31, adjusted EBITDA of 204.3 million represents 21.3% of
Tim OLeary: The preferred stock on our balance sheet was redeemed in full during the quarter, which resulted in a fourth quarter preferred dividend of only 2.65 million, consisting of 1.55 million paid in cash and 1.19 million of a pick component.
Tim OLeary: Given the redemption, we accelerated the accretion of the unamortized original issuance discount which had a $5.6 million impact and we also paid $2.7 million in excise taxes on the redemption.
Tim OLeary: Before turning the call back over to Tom, I want to take a minute to address a few other items.
Tim OLeary: First, I wanted to note that subsequent to quarter end, we used ten million of our excess cash balances to make a prepayment on the terminal imbalance. So you will see the impact of that on our March 31st balance sheet when we follow our Q1 results in early May.
Tim OLeary: Consistent with our efforts in 2024, we will continue to evaluate opportunities in 2025 to further reduce our cost of capital and deliver the balance sheet.
Tim OLeary: On that point, even if you were to assume that there was no further debt paid out throughout the year, we would be under four times net leverage by year end if you used the midpoint of our 2025 adjusted EVDA guidance.
Tim OLeary: The next item relates to our 2024 audit in 10K, and those filings, you'll note that we disclosed the material weakness in our internal controls over financial reporting.
Tim OLeary: The material weakness relates to the design and operating deficiencies in certain automated controls around a gestion and validation of a third party processor's data and our control environment, which is used in revenue and commissions processes.
Tim OLeary: and deficiencies in certain IT general controls around the privilege access to certain users.
Tim OLeary: The deficiency related to privilege user access impacted one of our applications and our investigation found no evidence of inappropriate use of those privileges.
Tim OLeary: The access issue has already been remediated, but it was not an effective control at your end.
Tim OLeary: The management team and our board of directors take these matters seriously and we are actively working to promptly remediate the automated control's efficiency and will provide updates on our progress and related testing throughout the year.
Tim OLeary: Importantly, I want to highlight that the material weakness did not result in a restatement or any change to our consolidated financial results.
Tim OLeary: We remain confident that our consolidated financial statements present fairly in all material respects, the financial condition of our business, and our auditors have also issued an unqualified opinion on our financial statements.
Tim OLeary: The last item I'd like to touch on is our Financial Guidance for the full year.
Based on continued strong growth trends,
Tim OLeary: Lastly, adjusted EBITDA's forecast to range from 220 to 230 million, representing your growth up to 13% at the high end of the range.
Tim OLeary: The lower evidog growth expected in 2025 is driven by higher expenses, resulting from the continued migration of certain platforms to the cloud, which converts CAPEX to OPEX, but over time will provide incremental platform efficiencies.
Tim OLeary: along with increased accounting costs related to SOX compliance, including a remediation effort.
Tim OLeary: However, we will continually evaluate ways to create additional operating leverage in the business and will strive to reduce the impact of these efforts through further expense reductions in the common quarters.
Tim OLeary: To provide some color on the guidance by segment, we expect high single-digit revenue growth in SMB as we continue to add new resellers and benefit from the impact of new merchant boards with our existing partners.
Tim OLeary: B2B's top line growth in 2025 is expected to be in the low double-digit range which is lower on a comparative basis to 2024's reported growth given the full year effect of plastic which only had five months of results in 2023.
Tim OLeary: But we also expect our supplier-funded strategies to have continued growth of over 20 percent.
Tim OLeary: Lastly, Enterprise is expected to continue its momentum, although we have moderated our growth percentage expectations in 25 to account for the strong growth already experienced in 2023 and 24, along with a simple math of a larger denominator.
Tom Priore: With that, I'm now turning the call back over to Tom for his closing comments.
Thank you, Tim.
Tom Priore: During the closing segment of our earnings call, I'd like to discuss a few of the more critical strategic accomplishments of 2024 to orient our stakeholders around developing opportunities
Tom Priore: During past calls, I've often noted that we work relentlessly to see around corners.
to have foresight and operate with intention and clear planning.
Tom Priore: Whether that is engineering our highly curated technology platform or the design of our business segments to be sustainable in varying macroeconomic environments.
Tom Priore: I've highlighted the disciplined acquisitions and their contributions to our performance.
That Reflect Our Unified Commerce Vision
So that our current and future stakeholders
Tom Priore: might be convinced by the strength of our compound annual Adjusted EBITDA growth of 19.8% from 2018 to 2024.
Tom Priore: and the reduction of our debt EBITDA ratios by over two turns since 2021.
Brian Kinstlinger, Chris Kettmann, Timothy OLeary, Priority Tech
Speaker Change: Party routinely stays ahead of market trends in its technology, operations, and decision-making are geared for the future of payments.
That Future for the Priority Team
Speaker Change: As always been to complement our consistent market leading organic growth with the ability to be a consolidating platform for payments and financial technology opportunities.
that may be struggling with legacy tech, inefficient operational execution.
We're undisplended vesting in products.
or vertical SAS properties.
Simply put, to be opportunistic.
Speaker Change: That's why we were ruthlessly focused on retiring our preferred debt in 2024.
and Enabling Greater Liquidity
Speaker Change: in our equity currency, which we accomplished through our recent secondary offering that roughly doubled our tradable flow.
Speaker Change: We believe that these important accomplishments would accrue to our share price.
Speaker Change: and it might better reflect the fundamental value of our platform.
Speaker Change: While we are presently a good distance from what we think is a more appropriate valuation in line with the slower growing peers at 10 to 12 times pro forma 2025 adjusted EBITDA.
We're optimistic that the combination of our consistent financial results.
Increasing exposure to and support from our shareholders
Speaker Change: and continued debt paydown similar to the $10 million prepayment that Tim referenced in his earlier comments.
Speaker Change: We'll create a currency that can be successfully used for creative acquisitions.
Speaker Change: In the current environment, a proportionally stronger currency will be key to driving outside the investment returns.
via under-optimized assets and payments.
Vertical Markets Software and Banking as a Service Technology [inaudible]
For more information, visit www.FEMA.gov
Speaker Change: Whether organically or through synergizing acquisitions, our Tech-enabled service platform is delivering on the promise of a personalized financial tool set.
that unlocks value for our partners.
Speaker Change: Whether those are businesses enhancing their profitability through better cash flow visibility and working capital solutions, ISVs and FIs, adding our financial solutions to enhance their customer's experience, retention and margins, or resellers.
https://www.youtube.com.au
Speaker Change: Building their success by delivering our modern commerce solutions to their existing and growing portfolio merchants.
Speaker Change: Its success is evident in the top and bottom line financial performance and improving margins which have meaningfully outpaced our peers for several quarters now.
Speaker Change: We believe we have the team, the technology, and the grit.
To continue to organically deliver industry-leading results.
Speaker Change: But we also believe the further strength of our public currency will position priority for transformative, highly accretive opportunities emerging in today's market.
Speaker Change: Before concluding, I want to take a moment to recognize and thank my brother John .
Speaker Change: who is transitioning from his role as a board member and being replaced by Clayton Maine.
brings a wealth of experience and leverage finance.
Speaker Change: and Vertical Software and Payments Investing, as well as highly relevant relationships to priority.
Well, John's future support for priority may be less obvious.
I know he will always be an ardent advocate.
John , it's been an amazingly fun and rewarding journey together.
Building something that lasts beyond one's self is truly unique.
and you've done that.
As you look back,
Speaker Change: I hope you take great pride in all of your contributions to where priority stands today and importantly,
Where it is poised to go in the future.
I love you.
As always,
Speaker Change: I want to thank my colleagues at Priority who continue to work incredibly hard.
to deliver industry-leading results
Speaker Change: Your commitment and dedication to continuing to improve everything we do is clear.
Speaker Change: Providing our partners and customers with constant reminders that they made the right choice to partner with priority.
Left
Speaker Change: We continue to appreciate the ongoing support of our investors and analysts.
Speaker Change: and for those in attendance who are new to priority for taking the time to participate in today's call.
Operator, we now like to open the call for questions.
Speaker Change: Thank you. To ask a question, you may press star than one on your touch-tone phone. If you're using a speaker phone, please pick up your hands up before pressing the keys. To withdraw your question, please press star than two.
Jacob Stefan: The first question comes from Jacob Stephan with Lake Street Capital Markets. Please go ahead.
Jacob Stefan: Hey guys, congrats on the strong year, the balance sheet progress, and special congratulations to John on his retirement.
Jacob Stefan: Just first, I want to touch on the capital allocation priority. You guys noted another 10 million worth of debt pay down in Q1, but how do you think about, you know, overall strategy between balancing kind of that principle pay down.
Jacob Stefan: with maybe increased catbacks or, you know, as she may spend on the income statement.
Thanks, Jacob.
Jacob Stefan: So, some order to pass quarters, we're going to continue to evaluate the best use of
Jacob Stefan: Deb Paydown is obviously a key focus for us. We continue to hear from investors that, you know, leverage is something they're focused on, so we'll continue to naturally do leverbalt with growing EBITDA as well as using our free cash flow to reduce our debt balances.
Tom Priore: But we've balanced that by looking at M&A. We see a lot of opportunities in the market. Tom referenced what we're seeing out there from a lot of dislocation on certain other assets. So there's opportunities to be a consolidator, but we're going to balance that against leverage in how we use our capital.
from a internal capital allocation standpoint.
Tom Priore: We've talked about converting some of our CAPEX to OPEX as we move more and more of our platforms.
Tom Priore: to a common cloud basis, which puts burden on EBITDA in the short term, but over time is going to add efficiencies as we get to a common backend structure from a technology standpoint and development standpoint across all those platforms and you get better efficiencies across your developer team.
Speaker Change: Yeah, that's very helpful. And then, you know, I think the most recent rate cut forecast, you know, calls for three cuts in 2025. Just kind of, you know, looking at your guidance wondering how, you know, that factored in, if at all.
Speaker Change: It does, we factor in, you know, the Fed dot plot and looking at the interest rate curves and try to come up what we feel is the right approximation. We tend to
Speaker Change: Play things on the conservative end, certainly at the beginning of the year, as you think about what the markets could hold for us.
Speaker Change: and if you look at just the impact from Q3 to Q4,
Speaker Change: You had a hundred basis points of Fed rate cuts between September and the end of the year. If you look at the average effective Fed funds rate in those two quarters, it averaged out to 61 basis points of adult between those two quarters. So that has an impact as well, just quarter to quarter. But
We did factor that into our 25 guidance.
Speaker Change: And Jacob, maybe on that point, we've taken a pretty conservative view of deposit growth.
Speaker Change: So, you know, a lot of our expectation is I'll just say based on a stable base, not a growing base of deposits.
You know, we've seen it healthy.
Speaker Change: You know, just based on our win rate, you know, we're seeing a healthy growth and...
You know on deposit balance, so you know
Speaker Change: We think there's just a conservative measure to its impact. The other thing I would just note as it relates to your question on use of capital for deleverging or strategic opportunities.
The...
There's a lot of interesting...
You know dislocation occurring You know
Venture
Funning to, you know, call it [inaudible]
Speaker Change: Subscale, SAS, you know, really hasn't turned around so you know there's some really interesting opportunity.
Speaker Change: You know, we'll consider in sectors where we already play in consumer directed benefits, construction, real real same property tech.
Speaker Change: that we've historically done well. But it'll be very opportunistic. I think you guys probably already know you're following it every day. There's the emerging...
Challenges on some...
Speaker Change: You know, within payments is becoming apparent. And you know, it's something we, you know, for what it's worth we reflected was was more than likely. So
Speaker Change: You know, so we're gonna, we're gonna keep on charging ahead and you know we're gonna be really
Speaker Change: Eager for your support with investors, understand the priority story is just differentiated because the value of our currency relative to our peer set really increases the opportunities to to do transformative things.
Speaker Change: Okay, I appreciate all the colors. I'll hop back in the queue here.
Thanks, Jacob.
Speaker Change: The next question comes from Brian Kinstlinger that aligned with global partners. Please go ahead.
Oop, my knee.
Speaker Change: My, sorry, one second. Can you hear me? We got you, Brian . We can. Yeah, you're good, Brian .
Yeah, so...
Speaker Change: It's great to see you take care of the liquidity overhang that we've discussed for a long time and I'm glad to hear the leveraging is a key focus.
Speaker Change: Well, I know your consumer segment generally does not have a lot of retail and consumer product businesses you serve.
Speaker Change: Some of the businesses you're working with, basket sizes, demand in any other way, and if so, how would it all did you handicap this in your guidance?
Speaker Change: in the acquiring side of the business, because…
they're
Speaker Change: The utilization of card, it actually increases the probability because buyers are now, they're paying to pay on card to preserve working capital.
Speaker Change: So, not only with the impact of tariffs sort of create inflation, the probability of utilization of, you know,
Digital Payments actually increases, and that's what we've seen.
Speaker Change: The area where we're most excited about candidly is actually on the B2B side because working capital is now getting constrained and that segment, so we're seeing a...
Speaker Change: You know, a nice level of demand for buyer-funded strategies and other efficiencies that are able to get created through automated payables.
Speaker Change: Just because now the necessity continues to, you know, to get greater. So that's where we're seeing actually the impact
and, you know, that…
Speaker Change: I hate to state the obvious and keep pounding away on it, but that's why we're not a monoline payments enterprise we've created
Speaker Change: You know, opportunities that are counter-cyclical, and you know, this is just one of them. So, that's what we're seeing thus far. But obviously, we feel like we've created, you know, a level of conservatism in the view of that.
of our financials for the year. So, if we see adjustments, we'll be able to react quickly.
Speaker Change: Great, that's helpful. Now while management really has built a solid resume of execution in the years I've covered priority.
Speaker Change: Can you explain why over the last two years the gross margin, percentage for consumer payments has seen a steady decline? I think I heard.
Speaker Change: for fourth quarter, something about inventory, inventory write offs. What was the size of that? And what is an inventory write off in payment processing for SMBs? I'm not quite sure I understand.
Thank you.
Speaker Change: Sure. Let me, let me just got a couple questions in there. I'm going to hit the, the, the margin. Um, actually, um,
and Please LIKE and SUBSCRIBE!
Speaker Change: We had some residual purchases early on in our history as a public company.
Speaker Change: and as those purchases of portfolios begin to run off, that's really been the catalyst for where you see kind of margin decline.
Speaker Change: It's just actually a bit artificial because when you look at the remainder of the organic business
and the way it's growing, it's actually...
Speaker Change: that margin is expanding and Tim will speak to the particular details. Before Tim goes, could you then touch on what is sustainable?
Speaker Change: Gross Margin for that sector as you see that if they're still portfolio run off is it 20% is it 21% I mean what what do you think is sustainable? sustainable.
and Chris Kettmann.
Look, certainly, where are we?
Mid to upper 20s. The other thing, this is what could influence it and we've been super conservative. We have not projected anything in terms of
Speaker Change: The cross-selling that has the gun of payables and banking into that segment.
But that can have a dramatic effect on margin expansion.
Speaker Change: You know, increasing it by, you know, tens of percentage points. So that's why we're on that journey. That's why we're on that journey. But as of today, you know, until we feel like we have proper adoption stats.
Speaker Change: You know, we'll be conservative about projections but let me let Tim speak some of the specifics.
Tim OLeary: on the latter question, and then we can kind of talk about the one time right now.
Tim OLeary: Sure. Brian to give you a few more data points. So, the...
Cross-Selder Reseller Base into the N Merchant Base.
Speaker Change: You can't really do an effective job in selling those into the market, so those were coming up in expiration, so we took the right off in the fourth quarter. It's listed out in the $10K from a dollar-mots standpoint, but it was a $3.5 million dollar write-down of that inventory.
Speaker Change: So, if you normalize for that non-recurring item, margins are actually flat, quarter to quarter. So, at the Tom's point.
Speaker Change: We've actually seen some margin expansion in other areas, but those historical residual purchases, as those are to trick off over time, you're effectively losing 100% margin business if that runs down, so that puts an additional headwind on the margins overall.
Speaker Change: If you normalize for both of those two items, the inventory right off, and if you also backed out the impact of the residual purchases running down, we actually saw core margins in the S&B business expand by 120 basis points.
Speaker Change: that incremental revenue flowed through at a nearly 29% gross margin. Obviously the aggregate margins aren't that high but the incremental revenue we're bringing on is coming in at a higher margin. It's just being a little bit distorted in the financials by one, the right down at the inventory and two, the historical residual purchases running down.
Speaker Change: Great. That's super helpful. Last question for you, Tim. Another numbers question. You mentioned some shift of cat-backs to up-backs.
Speaker Change: That is going to weigh a little bit on expenses or cause a little bit of otherwise more growth than expenses. Could you just kind of highlight what those are?
. . . . .
Speaker Change: Sure, it's really migrating from some of our hybrid cloud environments. We're operating our own data centers.
Speaker Change: but then by the end of 25, that should be fully run through and we'll get to a normalized level of op-x.
Great. Thanks guys.
Speaker Change: Okay, Brian , I just put it like a fine point on this because it...
Speaker Change: We have been very intentional about maintaining a single platform because we know the risks of
of not maintaining that discipline.
and Chris Kettmann.
Our ability to move from
Speaker Change: What was I'll call it, you know, semi-Semi-private cloud, right, where we had...
Speaker Change: Some of our apps on private cloud environments that we developed early on.
Those are being retired and consolidated to a single application.
which is why the migration.
Speaker Change: and then as we do that, it allows us to really more efficiently manage engineering costs going forward.
because we're not maintaining those.
Legacy Set-ups [inaudible]
Speaker Change: And they're more in line with, you know, what I would just say is a modern engineering framework where most engineers are trained.
Speaker Change: So, it allows us more versatility in the expertise of the people that join priority on the engineering side. So, it's actually an important evolution and I just want to give you some context around understanding why the timing is now.
and it will ultimately, you know...
Reduce a good bit of of cat-backs on the back end.
Speaker Change: The next question comes from Tim Switzer, with KBW, please go ahead
Thank you. Good morning. Thank you for taking my questions. But the first question I have is on
Tim Switzer: The guidance you guys provide, I appreciate the segment by segment level. You know, what are some of the factors that would drive you to the higher low end of the guide outside of the macro here? And you know, is the enterprise segment, primarily the going to be the primary driver on which and the guide you had?
Tim Switzer: You know, I think I'll let Tim speak to a handful of items. It's not going to be driven just by enterprise now. I would say that things that will influence towards the top end of the range will be.
You know as we start to get
A sense of the impact of cross-cell.
Speaker Change: in the SMB space as Tim already noted. We're actually seeing good margin expansion on an organic basis.
Speaker Change: Once you factor in, you know, call it Legacy Portfolio, acquisitions from back in 2018.
Speaker Change: Just to give you some context, many of those acquisitions were...
Speaker Change: Refellors who said, hey, I want to be part of priorities, go forward and took...
Speaker Change: The cross-cell is really just beginning. That will impact us to the higher end of the range.
Speaker Change: The other is noting the B2B pickups we're seeing in both buyer and supplier-funded strategies.
Speaker Change: You know, those will be impactful. And then lastly, you know, your observation on our prizes, it is not wrong, as you see, it is the highest margin business because, you know, it just...
Thank you.
Speaker Change: It creates such a dynamic relationship with the customer that uses all aspects of our business, from payments to banking, called money at rest, you know, as well as other opportunities to monetize payouts.
through card strategy, debit card, what have you.
Speaker Change: Those segments are, you know, they're really just now picking up.
Momentum. In a major way. [inaudible]
Speaker Change: Higher win rate, faster conversions, they could definitely pull forward the revenue projections in a very, very meaningful way.
So
Speaker Change: In an effort not to, you know, say, predict timing, you know, we've been real conservative in the way we've reflected, you know, what the business can do and, you know, have a high, high confidence in the numbers you see.
Speaker Change: Okay, great, that was helpful. And you guys have talked about before, how you're now going to market in the B2B segment with plastic bundled with CPX. What has been the customer reaction to that? And has it helped improve sale activity?
Speaker Change: It has, and let me let Tim speak to just some of the recent statistics on the increases we've seen in volume and activity, but look as you might imagine.
Hey, if I'm looking to extend working capital, um...
Speaker Change: and you know, as a company which I think we can all appreciate and the current environment is becoming more of a need, not left. Having more tools to do it is better. So we're seeing pickup in a couple interesting ways. Just number one.
Speaker Change: We're seeing customers that are already on platform using more of the tools. So FIs that are using us for buyer-funded are now starting to explore other areas of our supplier-funded tools and how to work together.
We're seeing other...
B2B Payments Business that just have gaps.
in their stack.
Speaker Change: and maybe don't do supplier enrollment quite as well and need other strategies that complement their largely ACH-driven platforms coming to us in using our card strategies.
So that's been an interesting development.
Thank you.
You know, I would expect...
Speaker Change: That to occur more or not last year of the year, particularly as, you know, the impact of tariffs.
Become More Clear to Everybody .
Speaker Change: Tim, maybe you want to highlight some of the…
Speaker Change: Some of the volume, you know, Q-Four to...
Speaker Change: We've got to where we're trending, or some of the recent trends I'll say that we can speak to.
Speaker Change: Tim were pretty consistent with what you've seen from a revenue standpoint in B2B, so we had nice growth, you know.
Year of a year and certainly quartered a quarter.
Speaker Change: You know, the buyer-funded model, right? Plastic, right? You can think about it historically. You're using that, that nomenclature. Yeah, that business is continuing to grow.
Speaker Change: So over the last year, it was probably a little bit slower growth than what we wanted it to be, but we've found a nice cadence now including going up market in a lot of cases with enterprise level customers and adding on some larger banks into Tom's earlier point.
Speaker Change: It's talked to predict the ramp and how fast those businesses will accelerate, but we've won those new logos, if you will, and we're starting to see the benefits of that.
Speaker Change: Yeah, some of the numbers in December and January are indicative of that and we built that into our guidance for the years, you think about what we're predicting for the BDB segment.
Got it. Thank you for the color.
Speaker Change: The next question comes from Brian Bergen, which is TD Cohen, please go ahead.
Hi guys, good morning. Thank you for taking the questions.
Speaker Change: One of the start on enterprise first, we can open it again on CFP Pay and some of those counters, sick, local attributes. Can you talk about how you're projecting maybe the pace of bill, client ads here in enterprise as you move through 25, understanding you have a growing base in the business here, but you're expecting anything in terms of pick up, given we're overall revolving, credit outstanding balances are, and just anything important when we think about things like charge loss.
Yeah, you know, as you noted, right, this is, uh,
I'll call it. It's counter-cyclical too.
Speaker Change: You know, it's overall kind of a consumer spending. Look, there's been some interesting developments when you look at charge-offs in the tearing of credit generally. Who's spending and who's not?
You know, sharing what I can, boarding trends have been very consistent.
Speaker Change: Coming out of the, you know, going into the new year, and then what we've seen, you know, through Q4, Q3 and Q4.
So...
You know, if anything, we've probably…
Speaker Change: aired more to the conservative side of our modeling of boarding trends.
Look, they're at a historically high level.
Speaker Change: I don't think they come off that level, but we've been judicious.
in the way we've projected it.
Speaker Change: You know, perhaps not to, you know, to remain quite so high, but based on the...
Speaker Change: Economic Environment, it certainly doesn't appear a let-up is likely. You know, I also think this segment, you know, would all define broadly as consumer wellness.
You know, has-
Has systemically changed, where there will be more?
Speaker Change: Customers eligible for, you know, resolution products to help them, you know, merge from, you know, from that issues.
Speaker Change: and that's just because the environment has changed for credit counseling and other consumer wellness-oriented products, which is driving a larger base of consumers to a resolution partner. So...
Speaker Change: That's I think that's permanently going to benefit the sector to be candid, but
Speaker Change: That optimism is, I would say that optimism is not things we built into our projections.
Ciao.
To the extent we're right.
It'll accrue to the upside.
Speaker Change: Okay, understood. That's helpful. And then, Tim, just on the 2025 OptX Dynamics, is that earlier? I was hoping you can give us a sense of the magnitude of that CAPEX to OptX Shift, just so we have a sense of the underlying profitability. And I don't know if it's easier to bridge what the impact was as you started to experience this shift in the second half of 24 into 25, just any way to frame that impact rolling through OptX.
So I think for 25, 5
Speaker Change: It's a ballpark called a $4 million impact from an Outback standpoint, plus or minus, depending on some of the timing of it then.
Speaker Change: When we make some of those conversions, but that's a good ballpark to use for 25 with that conversion to OpEx.
Speaker Change: Okay, and then just any other, as we think about free cash flow, any important considerations and expectations around free cash flow conversion in 25.
Thank you for joining us.
Speaker Change: Well, obviously interest rates have an impact, so if you think about our business today, we're pretty effectively hedged from a cash flow standpoint. Obviously, our debt is floating rate, the income we generate on a permissible investments [inaudible]
Speaker Change: For the most part, Floating Rates, you effectively tied to Fed Fund's type rates.
So his rates come down.
Speaker Change: We'll see some pressure on either DA, but we'll also see our interest rates come down in our debt as well so cash flow is somewhat neutral there.
Speaker Change: If rates stay higher for longer, that's going to benefit the P&L. Going back to maybe the earlier question, somebody else asked around what's upside to the guidance range. If rates stay higher for longer, that's a benefit to the P&L.
Speaker Change: But no other meaningful changes from a cash flow standpoint in 25, CapEx will be pretty consistent and most of our CapEx is capitalized software development for new products to generate new revenue.
Speaker Change: M&A, you know, some tuck-in M&A activity will be relatively small. Anything, you know, transformative obviously will be a change in the capital structure, but know what the meaning for chefs.
All right, very good. Thank you very much.
Speaker Change: Once again, if you have a question, please press star, then one.
Speaker Change: The next question comes from Bella Hundreds, a PCA group. Please go ahead.
Bella Hondros: Hi, I see that you included an adjusted EPS figure in your earnings release, but it wasn't something that you discussed in your prepared remarks. Is that a figure you're going to continue to provide going forward and is there any guidance you can offer on 2025 expectations?
Thanks, no good question, so it's...
Bella Hondros: Yeah, we put out adjusted EPS this quarter, obviously that the gap EPS was impacted by a couple non-recurring items, including debt modification costs as we took out the preferred equity during the year, we raised incremental capital to do that, and then there was also the acceleration of the unamortized discount on the preferred equity, so that had an impact, which is why we ultimately showed the adjusted EPS.
Bella Hondros: which for the quarter was 18 cents and 51 cents for the full year.
Bella Hondros: We'll continue to provide that figure. As our tax rates start to normalize, you wait a 35% effective tax rate this quarter, you know, over time as we continue to become.
Bella Hondros: Higher profitability and start to work through some of the the allowances against that with 163J and other items. That tax rate will more closely approximate 30%. So I think ETS becomes a more relevant factor for us.
Bella Hondros: We haven't put out official guidance for 25 from an EPS standpoint, but...
Bella Hondros: We finished 24 with 51 cents and I think you could easily see that number doubling closer to a dollar share based on just normal course growth from 18 cents to Q1 and Q2 of 25. So I think a dollar share is a good approximation for what we would see it.
Thank you.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Tom Priore for any closing remarks. Please go ahead.
Speaker Change: All right, thank you very much. We want to thank everybody for taking the time to participate and we are looking forward to what the 2025
Year is going to hold for priority.
Everyone's focused on execution.
Speaker Change: So, we'll look forward to gathering again in a couple of months to...
Discuss how we did in Q1. Thanks everyone.
Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker Change: . . . . . . . . .
Speaker Change: . . . . . . . . . .