Good morning, and welcome to the Priority Technology Fourth Quarter 2024 Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Chris Kettmann. Please go ahead.

Good morning, and thank you for joining us. With me today are Tom Priore, Chairman and Chief Executive Officer of Priority Technology Holdings; and Tim O'Leary, Chief Financial Officer. Before giving our prepared remarks, I would like to remind all participants that our comments today will include forward-looking statements which involve a number of risks and uncertainties that may cause 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 2024 earnings call. 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. I will then highlight our excellent Q4 results before handing it over to Tim, who will provide segment-level performance and key trends and developments within each of our business segments and Priority overall. 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. Summarized on Slide 3, Priority had an outstanding year by every key financial metric, growing net revenue by 16%, generating adjusted gross profit and EBITDA growth of 19% and 21% respectively, and improving operating income by 19% for the full-year 2024. 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. Tim will walk through the full-year 2025 guidance specifics later in the call, but I can reflect that the value of our diverse partners and customers see in our unified commerce platform and elegant product solutions provides confidence that we'll sustain the momentum in our acquiring, payables and Enterprise segments. We anticipate comfortably achieving 10% to 14% top-line revenue growth to a range of $965 million to $1 billion and generating 8% to 13% adjusted EBITDA growth to $220 million to $230 million in 2025, despite likely headwinds related to lower interest rates, a somewhat murky macroeconomic environment and the migration of some technology resources from a CapEx to OpEx treatment. Our unified commerce platform that streamlines collecting, storing, lending,…

Thank you, Tom, and good morning, everyone. As Tom mentioned, we had strong financial performance across the business in the fourth quarter and for the full-year. For the full-year, reported revenue growth of 16.4% compared to 17.1% of organic growth if you exclude the impact of the growth over from the partial year of Plastiq in 2023 combined with the large resellers diversification effort in the first half of 2023. Adjusted gross profit growth of 19.2% included 17.6% organic growth and adjusted EBITDA of 21.3% included organic growth of 20.6%. 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. 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%. Recall that, for the full-year of 2023, the combined adjusted gross profit of B2B and enterprise was right at 50% of total. 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. 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 card volume. The percentage of adjusted gross profit from recurring revenues has nearly doubled, since the beginning of 2022. 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…

Thank you, Tim. 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 in the year ahead. 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 whether that is engineering our highly-curated technology platform or the design of our business segments to be sustainable in varying macroeconomic environments. 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 might be convinced by the strength of our compound annual adjusted EBITDA growth of 19.8% from 2018 to 2024, and the reduction of our debt-to-EBITDA ratios by over 2x since 2021. Priority routinely stays ahead of market trends and its technology, operations and decision making are geared for the future of payments. That future for the Priority team has 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 or undisciplined investing in products or vertical SaaS properties, simply put to be opportunistic. That's why we were ruthlessly focused on retiring our preferred debt in 2024 and enabling greater liquidity in our equity currency, which we accomplished through our recent secondary offering that roughly doubled our tradable float. We believe that, these important accomplishments would accrue to our share price and it might better reflect the fundamental value of our platform. While we are presently a good distance from what we think is a more appropriate valuation, in line with the slower growing peers at 10x to 12x pro forma 2025…

Thank you. [Operator Instructions] The first question comes from Jacob Stephan with Lake Street Capital Markets. Please go ahead.

Hi, guys. Congrats on the strong year, the balance sheet progress and special congratulations to John on his retirement. 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 overall strategy between balancing kind of that principal pay down with maybe increased CapEx or SG&A spend on the income statement?

Thanks, Jacob. So similar to past quarters, we're going to continue to evaluate the best use of capital from a shareholder value standpoint. So debt pay down is obviously a key focus for us. We continue to hear from investors that, leverage is something they're focused on. So we'll continue to naturally delever both with growing EBITDA as well as using our free cash flow to reduce our debt balances. But we balance 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 and how we use our capital. From an internal capital allocation standpoint, we've talked about converting some of our CapEx to OpEx, as we move more and more of our platforms 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 back-end structure from a technology standpoint and development standpoint across all those platforms and you get better efficiencies across your developer team.

Got it. Very helpful. And then, I think the most recent rate cut forecast calls for three cuts in 2025. Just kind of looking at your guidance, wondering how that factored in, if at all?

It does. We factor in the Fed plot and looking at the interest rate curves and try to come up with what we feel is the right approximation. We tend to play things on the conservative end, certainly at the beginning of the year as we think about what the markets could hold for us. And if you look at just the impact from Q3 to Q4, you had 100 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 a delta between those two quarters. So that has an impact as well just quarter-to-quarter, but we did factor that into our '25 guidance.

And Jacob maybe on that point, we've taken a pretty conservative view of deposit growth. So a lot of our expectation is I'll just say based on a stable base not a growing base of deposits, and we've seen a healthy just based on our win rate, we're seeing a healthy growth in deposit balance. So we think, there's a 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 deleveraging or strategic opportunities, there's a lot of interesting dislocation occurring. Venture funding to call it subscale SaaS really hasn't turned around. So there's some really interesting opportunities that we'll consider in sectors, where we already play in consumer directed benefits, construction, real estate and property tech that we've historically done well. So it will be very opportunistic and I think you guys probably already know, you're following it every day. There's the emerging challenges on some of the peer set within payments is becoming apparent. And it's something we for what it's worth, we reflected was more than likely. So we're going to keep on charging ahead and we're going to be really eager for your support with investors, understand the priority story is differentiated because the value of our currency relative to our peer set really increases the opportunities to do transformative things.

The next question comes from Brian Kinstlinger with Alliance Global Partners. Please go ahead.

Sorry, one second. Can you hear me?

We got you, Brian.

Yes, you're good, Brian.

So, it's great to see you've taken care of the liquidity overhang that we've discussed for a long time, and I'm glad to hear deleveraging is a key focus. While I know your consumer segment generally does not have a lot of retail and consumer product businesses you serve, still do you see any impact from tariffs on some of the businesses you're working with, basket sizes, demand in any other way? And if so, how at all did you handicap this in your guidance?

Yes. Great question. And look, it's something we have been setting up for, to be quite honest with you to benefit from. We don't see a lot of impact on the acquiring side of the business, because there the utilization of card, it actually increases the probability, because buyers are now, they're looking to pay on card to preserve working capital. So not only will the impact of tariffs sort of create inflation, the probability of utilization of digital payments actually increases and that's what we've seen. The area where we're most excited about candidly, is actually on the B2B side, because working capital is now getting constrained in that segment. So we're seeing a nice level of demand for buyer funded strategies and other efficiencies that are able to get created through automated payables, just because now the necessity continues to get greater. So that's where we're seeing actually the impact. And 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 opportunities that are countercyclical and this is just one of them. So that's what we're seeing thus far. But obviously we feel like we've created a level of conservatism in the view of our financials for the year. So if we see adjustments, we'll be able to react quickly.

Great. That's helpful. Now while management really has built a solid resume of execution in the years I've covered Priority, 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 for the fourth quarter or something about 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.

Sure. Let me -- excuse me, I got a couple of questions in there. I'm going to hit the margin. Actually, we've seen organic margins actually increase, and I'll have Tim kind of speak to some of the details. But we had some residual purchases early on in our history, as a public company and as those purchases of portfolios begin to run off, that's really been the catalyst for where you see kind of margin decline. So it's actually a bit artificial because when you look at the remainder of the organic business and the way it's growing, it's actually that margin is expanding and Tim will speak to the particular details.

Before Tim goes, could you then touch on what is sustainable gross margin for that sector as you see that, if there's still portfolio runoff, is it 20%, is it 21%? I mean, what do you think is sustainable?

Look, certainly where we -- mid-to-upper 20s. The other thing and this is what could influence it, and we've been super conservative. We have not projected anything in terms of the cross selling that has begun of payables and banking into that segment. But that can have a dramatic effect on margin expansion, increasing it by 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, until we feel like we have proper adoption stats, we'll be conservative about projections. But let me let Tim speak some of the specifics on the latter question and then we can kind of talk about the one time write down.

Sure. And Brian, I'll give you a few more data points. So the one-time write down, we had pre-purchased certain licenses to cross sell through our reseller base into the end merchant base. So we pre-purchased those and ultimately just and -- didn't do an effective job in selling those into the market. So those are coming up in expiration. So we took the write off in the fourth quarter. It's listed out in the 10-K from a dollar amount standpoint, but it was a $3.5 million write down of that inventory. So if you normalize for that non-recurring item, margins are actually flat quarter-to-quarter. So to Tom's point, we've actually seen some margin expansion in other areas, but those historical residual purchases as those are tread off over time, you're effectively losing 100% margin business as that runs down. So that puts an additional headwind on the margins overall. If you normalize for both of those two items, the inventory write off and if you also backed out the impact of the residual purchases running down, we actually saw core margins in the SMP business expand by 120 basis points. And if you looked at just the Q4 of this year versus Q4 of last year and you compared those same normalized numbers, that incremental revenue flowed through at a nearly 29% gross margin. So 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 write down of the inventory and two, the historical residual purchases running down.

Great. That's super helpful. Last question for you, Tim, another numbers question. You mentioned some shift of CapEx to OpEx that is going to weigh a little bit on expenses or cause a little bit of otherwise more growth in expenses. Could you just kind of highlight what those are?

Sure. It's really migrating from some of our hybrid cloud environments. We're operating our own data centers or operating our own cloud environment into more of a public cloud. So going from CapEx to OpEx, right, paying as you eat in the public cloud environment, so that's going to have an impact on the year. We already started to see some of that in 2024 and it rolled into Q3 and Q4. That will continue to accelerate a little bit into 2025 as we make that full transition. But then by the end of 2025, that should be fully run through and we'll get to a normalized level of OpEx.

Great. Thanks, guys.

Brian, just to put like a fine point on this, because it -- we have been very intentional about maintaining a single platform because we know the risks of not maintaining that discipline. Our ability to move from what was I'll call it semi-private cloud, where we had 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. 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 setups and they're more in line with, what I would just say is a modern engineering framework, where most engineers are trained. 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'll ultimately reduce a good bit of CapEx on the back end.

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

Hi, good morning. Thank you for taking my questions. The first question I have is on the guidance you guys provide. I appreciate the segment-by-segment level. What are some of the factors that would drive you to the higher low end of the guide outside of the macro here? And is the Enterprise segment primarily going to be the primary driver on which end of guide you hit?

I think I'll let Tim speak to a handful of items. I would not -- it's not going to be driven just by enterprise now. I would say the things that will influence towards the top end of the range will be, as we start to get a sense of the impact of cross-sell in the SMB space, as Tim already noted, we're actually seeing good margin expansion on an organic basis once you factor in, I'll call it legacy portfolio acquisitions from back in 2018. Just to give you some context, many of those acquisitions were resellers who said, I want to be part of Priority's go forward and took shares as part of their acquisition, right? So as those run off, the cross-sell is really just beginning. That will impact us to the higher end of the range. The other is noting the B2B pickups, we're seeing in both buyer and supplier-funded strategies. Those will be impactful. And then lastly, your observation on enterprises, it is not wrong. As you see, it is the highest margin business because just it creates such a dynamic relationship with the customer that uses all aspects of our business from payments to banking, I'll call it money at rest, as well as other opportunities to monetize payouts through card strategies, debit card, what have you. Those segments are -- they're really just now picking up momentum in a major way. So higher win rate, faster conversions, they could definitely pull forward the revenue projections in a very, very meaningful way. So in an effort not to, I'll say predict timing, we've been real conservative in the way we've reflected what the business can do and have a high, high confidence in the numbers you see.

Okay, great. That was helpful. And you guys have talked about before how you're now going to market in the B2B segment with Plastiq bundled with CPX. What has been the customer reaction to that? And has it helped improve sale activity?

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 and as a company, which I think we can all appreciate in the current environment is becoming more of a need, not less, having more tools to do it is better. So we're seeing pickup in a couple of interesting ways. Just number one, 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 and maybe don't do supplier enrollment quite as well and need other strategies that complement their largely ACH-driven platforms coming to us and using our card strategies. So that's been an interesting development. So I would expect that to occur more not less through the year, particularly as the impact of tariffs become more clear to everybody. And maybe you want to highlight some of the volume over the Q4 to kind of where we're trending or some of the recent trends, I'll say, that we can speak to.

Yes. I think the volume trends, Tim, are pretty consistent with what you've seen from a revenue standpoint in B2B. So we had nice growth year-over-year and certainly quarter-to-quarter. The buyer funded model, Plastiq, if you think about it historically using that nomenclature that business is continuing to grow. Yes, 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 upmarket in a lot of cases with enterprise-level customers and adding on some larger banks. And to Tom's earlier point, it's tough 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. So, yes, some of the numbers in December and January are indicative of that, and we built that into our guidance for the year as you think about what we're predicting for the B2B segment.

The next question comes from Brian Bergen with TD Cowen. Please go ahead.

Hi, guys. Good morning. Thank you for taking the questions. Wanted to start on enterprise versus -- hoping to be get on CFTPay and some of those countercyclical attributes. Can you talk about how you're projecting maybe the pace of build client adds here in enterprise as you move through '25 understand you have a growing base in the business here. But are you expecting anything in terms of pickup, given where overall revolving credit outstanding balances are? And just anything important when we think about things like charge-offs?

Yes. As you noted, right, this is -- I'll call, it's countercyclical to overall kind of the consumer spending. Look, there's been some interesting developments when you look at charge offs in the tiering of I'll just credit generally, right, who's spending and who's not. Sharing what I can, boarding trends have been very consistent coming out of the -- going into the New Year and then what we've seen through Q3 and Q4. So if anything, we've probably aired more to the conservative side of our modeling of boarding trends. Look, they're at a historically high level. I don't think they come off that level, but we've been judicious in the way we've projected it, perhaps not to remain quite so high. But based on the economic environment, it certainly doesn't appear a let up is likely. I also think this segment, what I'll define broadly as consumer wellness has systemically changed where there will be more customers eligible for resolution products to help them merge from debt issues and that's just because the environment has changed for credit counseling and other kind of consumer wellness oriented products, which is driving a larger base of consumers to a resolution partner. So that's I think that's permanently going to benefit the sector, to be candid. But that optimism is -- I would say that optimism is not things we've built into our projections. So to the extent we're right, it'll accrue to the upside.

Okay, understood. That's helpful. And then Tim, just on the 2025 OpEx dynamics, as I asked earlier, I was hoping you can give us a sense of the magnitude of that CapEx to OpEx 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 2024 into 2025. Just any way to frame that impact rolling through OpEx?

Sure. So I think for 2025, it's a ballpark, call it, $4 million impact from an OpEx standpoint, plus or minus depending on some of the timing of it, and when we make some of those conversions, but that's a good ballpark to use for 2025 with that conversion to OpEx.

Okay. And then just any other, as we think about free cash flow, any important considerations and free cash flow conversion in 2025?

Look, obviously interest rates have an impact, right? So if you think about our business today, we are pretty effectively hedged from a cash flow standpoint, right? Obviously, our debt is floating rate. The income we generate on the permissible investments from our balances are for the most part floating rates, effectively tied to fed funds type rates. So as rates come down, we'll see some pressure on EBITDA, but we'll also see our interest rates come down and our debt as well. So cash flow is somewhat neutral there. 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. 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 go generate new revenue. M&A, some tuck-in M&A activity will be relatively small and I think transformative obviously will be a change in the capital structure, but no other meaningful shifts.

The next question comes from Isabella Hondros with DGA Group. Please go ahead.

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 yes, we put out adjusted EPS this quarter. Obviously, the GAAP 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, which for the quarter was $0.18 and $0.51 for the full year. We'll continue to provide that figure as our tax rates start to normalize. We had a 35% effective tax rate this quarter. Over time, as we continue to become higher profitability and start to work through some of the allowances against that with 163-J and other items, that tax rate will more closely approximate 30%. So I think EPS becomes a more relevant factor for us. We haven't put out official guidance for '25 from an EPS standpoint, but we finished '24 with $0.51 and I think you could easily see that number doubling closer to $1 a share based on just kind of normal course growth from $0.18 to Q1 and Q2 of $0.25. So I think $1 a share is a good approximation for where we would see it.

Thank you.

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.

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 is focused on execution. So we'll look forward to gathering again in a couple of months to discuss how we did in Q1. Thanks everyone.

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