Priority Technology Holdings, Inc. (NASDAQ:PRTH) Q4 2023 Earnings Call Transcript
Priority Technology Holdings, Inc. (NASDAQ:PRTH) Q4 2023 Earnings Call Transcript March 12, 2024
Priority Technology Holdings, Inc. misses on earnings expectations. Reported EPS is $-0.12 EPS, expectations were $-0.1. Priority Technology Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning and welcome to the Priority Technology Holdings' Fourth Quarter and 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. 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 Holdings; and Tim O'Leary, Chief Financial Officer. Before giving our prepared remarks, I would like to remind all participants that our comments today will include forward-looking statements, which involve a number of risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. The Company undertakes no obligation to update or revise the forward-looking statements whether as a result of new information, future events or otherwise. We provide a detailed discussion of the various risk factors in our SEC filings, and we encourage you to review these filings.
Additionally, we may refer to non-GAAP measures, including but not limited to EBITDA and adjusted EBITDA during the call. Reconciliations of our non-GAAP performance and liquidity measures to the appropriate GAAP measures can be found in our press release and SEC filings available in the investors section of our Web site. With that, I would like to turn the call over to our Chairman and CEO, Tom Priore.
Thomas Priore: Thank you, Chris, and thanks to everyone for joining for joining us for our fourth quarter and full-year 2023 earnings call. I'd like to start today by discussing the continued positive trends we're currently seeing in the business, as well as several important developments at Priority, including the successful integration process of our August acquisition of Plastiq. As a result of these trends and developments, we're excited to report the strongest results in our history, and we are well-positioned to perform even better in 2024, and beyond. Consistent with what we saw through the first nine months of the year, during the fourth quarter, we delivered strong results in SMB acquiring, B2B payables, and enterprise payments.
We remain convinced in the potential of our Unified Commerce vision, combining payments and banking functionality on a single platform, accelerated by the strength of our diverse business line, now we're positioned to benefit from higher interest rates, and to perform in a variety of macroeconomic environments, including the one we're experiencing today. Total customer accounts operating on our commerce platform now exceed 860,000. As we processed approximately $120 billion in transaction volume during 2023, while administering $900 million in deposits at the end of 2023. Looking at our financials, we maintained our positive momentum with strong results in the fourth quarter. Our Q4 revenue of $199.3 million, increased over 12% from the prior year.
This led to a 20% increase in adjusted gross profit of $72.9 million, and a 12% improvement in adjusted EBITDA to $44.6 million. Adjusted gross profit margin of 36.6% increased 230 basis points from the prior year quarter, highlighting the strong operating leverage of our purpose-built platform. For the full-year 2023, revenue increased 14% to $755.6 million, leading to a 21% gain in adjusted gross profit to $275.3 million. Combined with the 220 basis point increase in adjusted gross profit margin during 2023 to 36.4%, we generated a 20% increase in adjusted EBITDA over the prior year. As you can see from our results and the strong guidance we put out this morning, not only did we outperform expectations in 2023, but we also expect strong growth in margin trends in our business channels to continue in the year ahead.
We project to deliver full-year revenue of $875 million to $890 million, an increase of approximately 16% to 18% over 2023. In addition, we expect to generate full-year adjusted EBITDA of $193 million to $198 million, a 15% to 18% increase over 2023. Our confidence reflects the value our customers see in our product and technology offering, the strength of our diverse sales channel performance, and the efficiency of our operating teams that continue to deliver. Fueling our strong outlook, we expect the Plastiq B2B channel to be an important growth driver in the business as demonstrated by the success we're seeing so far. Since closing, on August 1, our teams have focused on synergizing operations and embracing revenue growth initiatives, mitigating drag on EBITDA from the acquisition, and demonstrating once again that we are uniquely built to systemically absorb and operating software in payment assets to quickly drive profits.
For those of you who are new to the company, slide six highlights the architecture of our proprietary Unified Commerce Platform that is purpose built to collect, store, lend and send money, combining robust payments and banking functionality to monetize the commerce networks we serve. Our customers and current market conditions continue to reinforce our belief that systems combining features of both payments and banking to distribute funds in multiparty environments will be critical as businesses put greater demands on software and payment solution providers to accelerate cash flow and optimize working capital. We're committed to meeting our customers' expectations by refining the experience of our partners to make working with Priority as seamless and simple as we can.
Our performance illustrates that partners consistently choose the Unified Commerce Applications in the SMB, B2B Payables and Enterprise segments that best fit their business, adopt the Passport Financial tools that meet their needs and move their money with Priority. We are highly focused on the continued innovation of our SaaS payment suite of services and the Passport Commerce Engine and are eager to meet the evolving needs of our growing portfolio of customers. At this point, I'd like to hand it over to Tim, who'll continue to provide further insights into our segment level performance during the quarter and the year, along with current trends in each that's factored into our guidance for the full-year 2024.
Tim O'Leary: Thank you, Tom, and good morning, everyone. As I review the results, please refer to the supplemental slides or the MD&A for further details. Our MD&A is included in the Form 10-K that was filed with the SEC this morning and provides a discussion of our comparative fourth quarter and full-year results. A link to that filing can also be found on our website. As Tom mentioned, we had strong financial performance across the business in the fourth quarter and for the full-year. I won't repeat the highlights already referenced. But before I go into segment level results for the fourth quarter, I do want to mention a few other key metrics as it relates to some of the discussion we had on our Q3 earnings call. For the full-year, adjusted gross profit from our B2B and Enterprise segments represented over 50% of total, while for the fourth quarter, that same figure was 57% as we continue to experience higher growth in our higher margin operating segments.
Recall that Q3 was the first quarter where the combined profitability of B2B and Enterprise exceeded SMB. In addition, the highly visible and recurring nature of our business model continues to gain momentum as over 58% of adjusted gross profit in Q4 came from monthly fees or revenues that are not dependent on transactions or Bankcard volume. Moving now to the segment level results and starting with the SMB segment on slide eight, SMB generated Q4 revenue of $139.9 million, which is $9.9 million or 7% lower than the prior year's fourth quarter. As discussed on prior calls, a large reseller partner started to diversify their activity, and we expected that diversification strategy to continue throughout 2023. If you look at the year-over-year impact of that shift on the Q4 results, it was an almost $18 million headwind to revenue.
Excluding that impact, the SMB business experienced over 5% revenue growth. Bankcard dollar volume in SMB was $14.6 billion for the quarter, which is down 2% from $14.9 billion in the prior year. However, adjusted for the aforementioned reseller, Bankcard dollar volume increased 7% in the quarter compared to the prior year. From a merchant standpoint, we averaged over 205,000 accounts during the quarter, lower than the 257,000 average in Q4 of 2022 and new merchant boards averaged 3,700 per month during the quarter compared to an average of 4,600 per month in last year's fourth quarter. Adjusting for the impact of the large reseller, the average number of merchant accounts during the quarter improved by 4,300, and the average number of new merchant boards increased by 300 per month.
As a last point on this topic, I would highlight that the diversification activity with the large reseller concluded in Q4. So, while we expect the related year-over-year impact in Q1 and Q2 of 2024 as we anniversary that change, the sequential quarters should not see a comparative headwind. Adjusted gross profit in SMB for the fourth quarter was $31.6 million which is $4.4 million lower than last year's fourth quarter. The 12% decline was partially impacted by lower volumes and revenue from the large reseller, but given its lower margin, that resulted in a modest $1 million reduction in gross profit. The quarter is also reflective of a shift in mix of volume, revenue and related gross profit from our top reselling partners who operate with higher commission rates.
Gross margins of 22.6% in the quarter are down from 24% last year for the same reason. Lastly for SMB, quarterly operating income of $11.1 million represents a $3.8 million decline from $14.9 million in the prior year's fourth quarter. Operating income was negatively impacted by the factors already discussed in gross profit. Moving to B2B, revenue of $21.2 million was an increase of $18.4 million from the prior year. Plastiq, which joined Priority on August 1, contributed $17.5 million of the increase during the quarter while CPX grew by $1.4 million or 57% on a year-over-year basis. Those increases were partially offset by a $300,000 reduction in the balance of the B2B business. Adjusted gross profit in B2B increased to $5.3 million as a result of the Plastiq acquisition, combined with 60% growth in gross profit for the CPX business.
For the quarter, gross margins were 24.9% compared to 62.1% last year. But as discussed in our third quarter earnings call, that decline is fully attributable to the Plastiq acquisition and the related impact of the GAAP reporting requirements for the Plastiq business compared to the balance of the B2B segment, which results in lower reported margins per unit volume. The B2B segment produced $1.7 million operating loss during the quarter, which was the result of increased operating expenses from Plastiq including certain nonrecurring compensation expense. Moving to the Enterprise segment, Q4 revenue of $38.1 million was an increase of $13.3 million or 53% from $24.9 million in the prior year. Favorable trends from the past several quarters and new monthly enrollments and billed clients combined with an increase in the number Passport program managers, growth in deposit balances, and the higher interest rate environment all contributed to strong revenue growth.
As a result of those factors, adjusted gross profit for the Enterprise segment increased by 55% to $36 million, while adjusted gross profit margins improved to 94.5% in the quarter. Operating income was $23.9 million for the quarter in the Enterprise segment. Moving to consolidated operating expenses on slide 11, salaries and benefits of $21.7 million increased by $4.8 million or 29% from Q4 of last year, but that was only $1.6 million higher sequentially than Q3 as we continue to focus on maintaining our expense discipline. Compared to the Q3 levels, the $1.6 million sequential increase was partially attributable to the full quarter impact in Q4 of the acquisition of Plastiq combined with higher bonus and benefit expenses in the quarter. We finished the quarter with approximately 980 employees, which is compared to approximately 870 at the end of 2022 and 990 at the end of Q3 2023.
SG&A of $14.1 million increased by $6.1 million from $7.9 million in Q4 2022, the year-over-year increase was due primarily to the acquisition of Plastiq in Q3 combined with noncash restructuring costs related to discontinued operations for part of our healthcare payments business, legal fees for certain nonrecurring litigation matters, and an increase in third-party software cost. Depreciation and amortization of $15.1 million for the quarter decreased by $2.9 million from the comparable quarter last year. Moving to the next slide, adjusted EBITDA for the quarter was $44.6 million which was an increase of 12% from $39.8 million in Q4 of 2022. Interest expense of $20.6 million for the quarter increased $4.4 million from Q4 2022 levels as a result of acquisition related debt increases in the quarter combined with the impact of the higher interest rate environment.
Moving the capital structure and liquidity overview on page 13, debt levels during the quarter increased to $654.4 million, which was driven by the issuance of $50 million of incremental term loan borrowings in the quarter. Proceeds from the issuance were used to repay revolver borrowings from the Plastiq acquisition and to put additional cash on the balance sheet for general corporate purposes. Net debt of $614.8 million was higher by $300,000 compared to the balance at the end of Q3. From a liquidity standpoint, we ended the quarter with all $65 million of borrowing capacity available under our revolving credit facility and $39.6 million of unrestricted cash on the balance sheet. For the LTM period ended December 31, adjusted EBITDA of $168.3 million represents $4.8 million of sequential quarterly growth from $163.5 million at the end of Q3 and $28 million, or 20% growth since the end of 2022.
Preferred stock on our balance sheet totaled $258.6 million at December 31st and is net of $16.9 million of unaccredited discounts and issuance costs. The fourth quarter preferred dividend of $12.5 million consists of $7 million paid in cash and $4.6 million of a PICC component. This is supplemented on our income statement with the accretion of discounts and issuing costs of $850,000. Before turning the call back over to Tom, I wanted to further address our financial guidance for the full-year 2024, which can be found on slide 14 in the presentation. Based on continued strong growth and trends in the business, we are forecasting 16% to 18% growth in revenue to a range of $875 million to $890 million for the year. Adjusted EBITDA growth is forecast to be 15% to 18%, which would result in a range of $193 million to $198 million for the full-year.
Given our prior comments on the margin variances in certain segments and even specific partnerships within the consolidated business, this year we are also providing guidance for adjusted gross profit, which we view as an important metric for measuring overall performance of the business since not all revenue is created equal. For the full-year, we are forecasting 18% to 22% growth in adjusted gross profit, which would result in a range of $325 million to $335 million. I'll provide some color on the guidance by segment. We're forecasting mid-single-digit growth in revenues from SMB as we anniversary the impact of the large reseller's diversification. If you adjust for that impact, we are forecasting low double-digit revenue growth in SMB. B2B's top-line growth will be skewed by the full-year effect of Plastiq, which only had five months of results in 2023, but we also expect CPX to show continued growth over 20% on a year-over-year basis.
Lastly, Enterprise is forecast to continue its momentum, although we have moderated growth expectations in 2024 to account for the strong growth already experienced in 2022 and 2023. With that, I'll now turn the call back over to Tom for his closing comments.
Thomas Priore: Thank you, Tim. Before wrapping up, I'd like to take a minute to discuss where priority is in our journey. Everything we've done over the past several years, from the significant early investment in our technology infrastructure, to our focus on diversifying our offering with countercyclical assets, to our acquisition of Plastiq, was done with intention and purpose to provide our customers with an elegant, unified commerce experience, combining our pillars in acquiring payables and banking on a single platform. Our results are demonstrating that we're achieving that goal. Priority has made the turn to delivering tech-enabled services that accelerate cash flow and optimize working capital through a powerful commerce platform to collect, store, lend and send money, allowing us to approach the marketplace in acquiring payables and banking solutions in a very unique way.
The success of our offering is evident not only in our growth numbers and margins, but also when talking to our customers and partners. While we are outperforming our peers in today's market, most importantly, the clear advantage we've created through our unique capabilities and style of engagement provides a long-term runway with enormous upside. Let me share one of the ways we've separated ourselves. On slide six, we've included a link to a video highlighting priorities, half-court product for the SMB and ISV acquiring channel. I highly encourage you to watch the two-minute video when you have a chance, as it showcases how our Commerce API can embed cutting-edge finance applications that optimize our customers' cash flow, streamline transaction reconciliation, and optimize working capital.
Through Passport's link to our MX Merchant acquiring tools, customers can have access to their funds in minutes of their batch closures, even on weekends and holidays. They can access bill payment tools that earn them cash back as they pay their bills, utilize embedded lines of credit as they need them, and even invest their surplus cash in money market, Treasury bill, and core bond funds. While this short video primarily highlights the SMB use case, it's just one monetization opportunity. Our technology is transferable across our current payable business lines and our growing list of enterprise verticals like instruction, investment management, lending, healthcare, sports and entertainment, and insurance, among others. Our decision, in late 2022, to accelerate investment in Passport is paying significant dividends, especially given the continued struggle of the banking sector, and the general frustration in banks among businesses of all sizes.
Our systems are built for the future and are proving ready for the current test under fire. We're confident, and our future results will demonstrate how we've taken unified commerce to the next level by meeting the demands of modern business, and empowering our customers to thrive in the real-time economy through unmatched speed and transparency to their cash flow. We're delivering this message as we broaden the unified commerce conversation, and it resonates with our current customers and prospective customers alike. In closing, I want to thank all of colleagues at Priority, who not only delivered an excellent year of growth and success in 2023, but entered 2024 more committed than ever to our mission. Thank for your continued dedication and the exceptional work you do every day.
And lastly, we appreciate you all taking the time to participate in today's call, and the ongoing support of our investors and analysts. Operator, we'd now like to open up the call for questions.
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