Priority Technology Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2023

There are 9 speakers on the call.

Operator

After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Chris Kettman. Please go ahead.

Speaker 1

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 we give our prepared remarks, I would like to remind all participants that our comments today will include forward looking statements, which involve a number of risks and uncertainties that may cause actual results to differ materially from our forward looking statements. The company undertakes no obligation to update or revise forward looking statements, whether as a result of new information, future events or otherwise. We provide a detailed discussion of the various risk factors our SEC filings, and we encourage you to review these filings.

Speaker 1

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.

Speaker 2

Thank you, Chris, and thanks everyone for joining us for our Q3 2023 earnings call. I'd like to start today by discussing some of the trends we're currently seeing in the business and then provide an update on important developments at Priority, including the successful integration process of our August acquisition of Plastiq. Consistent with what we saw in the first half of the year, During the Q3, we continued to execute in all three segments of our business, delivering strong results in SMB Acquiring, B2B and Enterprise Payments. We remain committed to our unified commerce vision of combining payments and banking on a single platform, Accelerated by the strength of our diverse business lines that we're positioned to benefit from higher interest rates and the current macroeconomic environment. Total accounts operating on our Commerce platform now exceed 820,000 processing over $118,000,000,000 in transaction volume on a last 12 month basis, while administrating in excess of 850,000,000 in average daily deposits.

Speaker 2

We're excited about our 2023 progress to date and working hard to close out the year strongly and position ourselves to accelerate in 2024. As you saw in our announcement earlier today, we maintained our positive momentum with strong financial results in the 3rd quarter. Our Q3 revenue of $189,000,000 increased 14% from the prior year. This led to a 23.6 percent increase in adjusted gross profit to 72,300,000 and a 28% improvement in adjusted EBITDA to $45,000,000 Adjusted gross profit margin 38.3 percent increased 310 basis points from the prior year quarter, highlighting the strong operating leverage of our purpose built platform. On a year to date basis, revenue increased 14.4% to $556,300,000 leading to a 22% gain in adjusted gross profit to $202,400,000 Now combined with a 230 basis point increase in adjusted gross profit margin In the 1st 9 months of 2023 to 36.4%, we generated a 23% increase and adjusted EBITDA thus far in 2023.

Speaker 2

As you can see from our published guidance this morning, we expect To end the year strong as current growth and margin trends in our business channels continue. As a result, We project to deliver full year revenue of between $755,000,000 to $765,000,000 an increase of approximately 15% over 2022. And more importantly, We're increasing our full year adjusted EBITDA guidance from our previously estimated $160,000,000 to $165,000,000 range to $167,000,000 to $170,000,000 a 20 plus percent increase over 2022. 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. A notable example contributing to our outlook is accelerating operating trends in the plastic B2B channel.

Speaker 2

Since closing on August 1, our teams went to work Synergizing operations and embracing revenue growth initiatives that mitigated drag on EBITDA from the acquisition and demonstrated once again that we're uniquely built to systematically absorb and operate software and payment assets to quickly drive profits. Now for those of you who are new to Priority, Slide 6 highlights the architecture of our proprietary unified commerce platform that combines Robust payments and banking functionality to monetize the merchant and partner networks we serve. Our growing customer base combined with current Uncertain market conditions continue to reinforce our belief that systems combining features of both payments and banking to accelerate cash flow and distribute funds in multiparty environments will be critical as businesses put greater demands on software and payment solution providers. We're committed to meeting our customers' expectations by refining the experience of our partners to make working with Priority seamless and simple. Our performance illustrates that partners consistently choose the unified commerce applications In SMB, B2B and Enterprise Payments segments that best fit their business adopt the Passport financial tools that fit their needs and are moving their money with priority.

Speaker 2

We're laser focused on the continued innovation of our SaaS payment suite of services And Passport Commerce Engine and 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 will provide further insight into our segment level performance during the quarter, along with current trends

Speaker 3

Thank you, Tom, and good morning, everyone. As I review the Q3 financial results, Including the segment level contribution to the consolidated results. Please refer to the supplemental slides or the MD and A for further details. Our MD and A is included in the Form 10 Q that was filed with the SEC this morning and provides a discussion of our comparative Q3 and year to date results. A link to that filing can also be found on our website.

Speaker 3

As Tom mentioned, we had strong financial performance across the business in the 3rd quarter and for the 1st 9 months of the year. Starting with the SMB segment on Slide 8. SMB generated Q3 revenue of $140,100,000 which was a $200,000 increase over the prior year's Q3. As discussed on our last earnings call, 1 of our larger reseller partners started to diversify their activity and we said at the time that we expected their diversification strategy to continue throughout 2023, which we continue to believe is the case. If you look at the year over year impact of that shift on the Q3 results, It was a $15,000,000 headwind to revenue in the quarter.

Speaker 3

If you were to exclude that impact, the SMB business would have had over 13% revenue growth on a normalized basis, which demonstrates that we continue to see strong results in the balance of the business. Bank card dollar volumes in SMB were $14,200,000,000 in the quarter, which is down 6% from $15,100,000,000 in the prior year. But again, the impact from the large reseller was the primary contributor to the decline as it more than offset year over year growth in the remainder of the segment. From a merchant standpoint, we averaged just under 240,000 accounts during the quarter, which is 5% lower Then in 252,000 average in Q3 of 2022. But if you exclude the impact of the large reseller, The average grew by over 5,000 accounts on a year over year comparative basis.

Speaker 3

For the quarter, new monthly merchant boards averaged 4,000 compared to an average of $5,000 per month in the Q3 of 2022. Adjusted gross profit in SMB for the quarter was down by $1,300,000 or 4 percent to $34,200,000 compared to last year. The decline in comparative quarterly gross profit Was partially impacted by the lower volumes and revenue from the large reseller, but as we stated in the past, that relationship generates lower margins for Priority. So the related quarterly reduction in gross profit was under $1,000,000 The quarter was impacted more by a $2,300,000 billing adjustment In Q3 of last year, that provided for a tough year over year comparison in this year's Q3. If you exclude those two items, Adjusted gross profit on an unaffected basis would have increased by approximately $2,000,000 in the quarter, which again demonstrates strong growth in the balance of the portfolio.

Speaker 3

Gross margins of 24.4 percent are down slightly from 25.4% in Q3 of last year. But if you exclude the impact of the billing adjustment in Q3 of 2022, gross margins in the core business improved by 30 basis points due to the favorable mix of revenues resulting from the combination of strong growth in the core acquiring business and a decline in the large but low margin reseller. Lastly for SMB, quarterly operating income of $11,800,000 represents a 1 point $500,000 in the prior year's Q3. Operating income was negatively impacted by the factors already discussed in gross profit. Moving to B2B payments.

Speaker 3

Revenue of $13,800,000 was an increase of $8,900,000 or 182 percent from the prior year. The acquisition of Plastiq, which closed on July 31, contributed $10,000,000 of the increase during the quarter, but that was partially offset by the final wind down of the Managed Services business. As previously discussed, we expected to see a year over year impact from Managed Services in Q3, but that comparative headwind will go away in Q4. And looking separately at CPX, that business grew by $1,200,000 or 47 percent in Q3 compared to last year's Q3. Adjusted gross profit in B2B increased to $5,000,000 as a result of the Plastiq acquisition combined with 60% growth in gross profit for the CPX business, which was also partially offset by the managed services wind down.

Speaker 3

For the quarter, gross margins were 36.2% compared to 61.2 percent last year, but that decline is fully attributable to the plastic acquisition, including the impact of the GAAP reporting requirements for the plastic business compared to the balance of the B2B segment. Gross margins for CPX continued to improve and were almost 85% for the quarter. The B2B segment produced $100,000 of operating income during the quarter, which was down $100,000 compared to last year due to the previously discussed operating losses of plastic and wind down of managed services. Moving to the Enterprise segment on the next page. Q3 revenue of $35,100,000 was an increase of 13.5 1,000,000 in Q3 of 2022.

Speaker 3

I'll sound like a broken record on this, but the favorable trends from the past several quarters in new monthly enrollments, An increase in the number of billed clients, growth in deposit balances and the higher interest rate environment have all continued to contribute to strong revenue growth. That strong revenue growth then flows through the P and L at a high conversion rate, which resulted in adjusted gross profit for the Enterprise segment increasing by 66% to $33,100,000 while adjusted gross profit margins improved to just over 94%. Operating income was $21,300,000 for the quarter the Enterprise segment. Moving on to consolidated operating expenses on Slide 11. Salaries and benefits of $20,100,000 increased 23% from Q3 of last year, but that was only $1,000,000 higher sequentially Then during Q2 of this year as we continue to maintain our expense discipline after investing in the business and team during 2022.

Speaker 3

Compared to the Q2 levels, the $1,000,000 sequential increase was almost entirely attributable to the acquisition of Plastic on July 31. We finished the quarter with approximately 9 90 employees, including 370 in our India Development Center, which is compared to approximately $875,000,000 at the end of Q3 in 2022. SG and A of $11,400,000 increased by $1,200,000 or 12 percent from $10,200,000 in Q3 2022 and $600,000 sequentially from $10,800,000 in Q2 of this year. The year over year increase was due to certain non recurring items including transaction related expenses for the Plastics acquisition. Depreciation and amortization of $17,300,000 for the quarter decreased modestly from the comparable quarter last year and from Q2 of this year.

Speaker 3

Moving to the next slide. Adjusted EBITDA for the quarter was $45,000,000 which was an increase of 28 percent from $35,100,000 in Q3 of 2022. Interest expense of $20,000,000 for the quarter Increased $6,600,000 from Q3 2022 levels as a result of acquisition related debt increases in the quarter combined with the impact of the higher interest rate environment. For those that have joined our prior calls, you likely remember that we have a natural hedge in place for the floating rate debt given the interest income we generate in our deposits. At the end of Q3, that natural hedge covered over 130% of the debt and just under 100 percent of the floating rate liabilities if you also include the preferred stock.

Speaker 3

Moving to the capital structure and liquidity Slide on Page 13. Debt levels increased during the quarter to $639,100,000 which was driven by the acquisition of Plastic on July 31st and the related borrowings on the revolver at that time. Net debt of $614,500,000 was Higher by $19,400,000 compared to the balance at the end of Q2 for the same reason. From a liquidity standpoint, we ended the quarter with $32,000,000 of borrowing capacity available under our $65,000,000 revolving credit facility and $24,600,000 of unrestricted cash on the balance sheet. Subsequent to quarter end, We raised an incremental $50,000,000 of term loan borrowings.

Speaker 3

That transaction was neutral on a net leverage basis with proceeds being used to repay the quarter end revolver borrowings in full and put additional cash on the balance sheet. For the LTM period ended September 30, adjusted EBITDA of $163,500,000 represents approximately $7,000,000 of sequential Quarterly growth from $153,600,000 at the end of Q2. Preferred stock on our balance sheet Totaled $252,900,000 at September 30 and is net of $17,800,000 of unaccreted discounts and issuance costs. The 3rd quarter preferred dividend of $11,400,000 consists of $6,800,000 paid in cash and $4,500,000 of a PIK component. This is supplemented on our income statement with the accretion of discounts and issuance costs of just over $800,000 Before turning the call back over to Tom, I wanted to discuss the revised revenue and adjusted EBITDA guidance for the full year.

Speaker 3

Based on the combination of year to date results And our latest expectations for the Q4 of 2023, we are reducing our full year revenue guidance to a range of $755,000,000 to $765,000,000 but we are simultaneously increasing our adjusted EBITDA guidance to a range of $167,000,000 to $170,000,000 for the full year. The revised guidance reflects the revenue impact that we've already discussed related to the diversification strategy being employed by one of our large lower margin resellers, but it also importantly reflects the continued strong performance that we expect in our higher margin operating segments. I'll state the obvious from a math standpoint, but this is the Q1 where the combined gross profit from our higher growth and higher margin B2B and Enterprise segments totals more than the gross profit of the SMB segment. Simply put, our business and the related mix of profit pools has evolved and not all revenue is created equal. So we will continue to invest our capital both human and financial in products and markets that we believe will create significant shareholder value.

Speaker 3

With that, I'll now turn the call back over to Tom for his closing comments. Thank you, Tim.

Speaker 2

As we conclude our Q3 review, I want to take a moment to reflect on the execution of our vision for unified commerce and a multi year planning and work that underpins our consistently strong performance. For those of you who have on these calls in the past few years and certainly if you work at Priority, you've likely heard me share my belief that the decisions of the past or the architects of our present. I would like to offer a brief reminder of a handful of the decisions that we emphasize to investors. In 2020, amidst the height of the pandemic, we noted that, and I'm quoting, We have and will continue to target growth in countercyclical assets, where businesses look for revenue in down markets and cash acceleration has more value. And we are managing our business several quarters ahead By building a platform to maintain stability and growth through varying business cycles That is a one stop shop for companies looking to monetize payments and acquiring and issuing without the headaches of managing payment operations, Client Service Risk Underwriting and Compliance.

Speaker 2

And again, following the acquisition of our Banking as a service assets in 2021, we stated that 'twenty one would be regarded as priority's year of transformation. When we realize our emergence as a payments powerhouse with a meticulously curated platform to collect, store and send money that would deliver differentiated products to our business channels. As downturn unfolded in 2022, what we had anticipated and planned for became a reality. Our strategy to remain lean and position our innovative agile technology to leverage the combination of traditional and countercyclical assets performed as expected, delivering nearly 29% top line and 45% bottom line growth. Our foresight allowed us to continue to accelerate our initiatives In new revenue channels that are early in the conversion to embedded finance and unified commerce solutions that positioned us to benefit from higher interest rates and the inflationary environment.

Speaker 2

Now I highlight these decisions of the past because I would submit that first, It's time that Priority be recognized as an organization that operates with superior vision and is built to last. And second, we're delivering on the promise of unified commerce with clear and sustainable financial performance as evidenced in our quarterly results throughout tumultuous economic environments like the pandemic and today. And last, that we've invested thoughtfully in technology and built Simply put, regardless of investment disclaimers that say otherwise, past performance is a predictor of future results. In closing, I want to share a short anecdote that I believe is informative of the culture at Priority. We have a tradition each Monday For one of our now 990 team members to share a reflection, what we call a Monday morning motivation, and they'd share it with the entire company.

Speaker 2

Last week's submission came from one of our UIUX designers, Jahamvi, that speaks to who we are as an organization. She shared, We honor the dream by doing the work. Priority is on a mission to change how businesses of all types and sizes Think about the movement of money and their expectations for cash acceleration, reconciliation and simplicity from their payment and banking partners. Our entire team is dedicated to our mission and honors our goals each day by doing the work. I want to say thank you to our dedicated team at Priority for delivering again this quarter and throughout 2023.

Speaker 2

And thank you to our investors and analysts for your ongoing support. Operator, We'd now like to open the call for questions.

Operator

We will now begin the question and answer session. The first question is from Michael Perito of KBW. Please go ahead.

Speaker 4

Hey, guys. Thanks for having me on the call and taking my questions.

Speaker 3

Absolutely, I wanted

Speaker 4

to start, so I was out in Las Vegas a couple of weeks ago for Money 2020 and I felt like there was A lot of conversations around kind of margins and pricing in the payment space, B2B Merchant Acquirer, you kind of name it. And I was just wondering maybe if you guys could Provide some context around kind of how the pricing dynamics in your business are trending and how the unified commerce approach has maybe helped insulate you guys a little bit from some of the pressures that some of your peers are clearly Seeing and speaking to.

Speaker 2

Yes, sure. Michael, by the way, great question. And Like this is the this is what Unified Commerce is designed to address, right? At the end of the day, customers of all sizes, whether you want to talk about the SMB market or looking up market, kind of more middle market and And even enterprise customers, there's a wallet share, if you will, right? And What we've been very successful at, I'll think about it if From a reseller's standpoint, what they're recognizing at priority is that payments It is about more than card acceptance.

Speaker 2

It's about certainly part of it Card acceptance or I'll call it digital revenue acceptance whether it's card ACH, right? But I want to predisposition that money to actually help my business grow. And Priority gives you all the tools to do that. Because when you get a While we're doing that AR work, it makes itself into it makes its way into a routable FDIC insured bank account where you could use that money quickly to pay vendors through virtual card, or you can use that using plastic With your existing credit to maybe capture early pay discounts and pay vendors who won't accept card, but get a benefit nonetheless because you have a cash back card and you're generating an early pay discount and the funds can get resolved Your payee the way they want them. So those are The types of elements we're bringing into a seamless experience across our channels, did just Make doing business with Priority a better revenue proposition, not just for the customer, but also for Our reselling channels that are the beneficiaries of 1, a more loyal customer, which is why our attrition is so low And 2, additional sources of really just earnings from Service is being provided.

Speaker 2

That's why when you look at the composition, and I think Tim alluded to this, Of our gross profit, more than 50% of it now is coming from services unrelated to, I'll call it transaction volume.

Speaker 4

That's helpful. Yes, I mean it's an interesting time and I think it's a good time to kind of have a different approach to growing and especially outside transaction volumes. I guess if we try to kind of bridge that to some of the financials, I know you guys aren't really yet providing a ton of color on 2024, but based on The dynamics of what you're seeing today and particularly, some of the good trends in enterprise and B2B, I mean, is the Expectations still, I mean, is it fair for us still to be kind of thinking about double digit top line and bottom line as we Think about the maybe the intermediate term? Or would you guys qualify or change that at all?

Speaker 2

Yes. I would say that that is A fair expectation. If I were to offer an opinion on the current guidance that is in the market, I would say it's a very low end reflection of the trend of the business. And one of the look, our the mix of our business and the Frankly, just the rapid adoption of our Passport Commerce platform, by large enterprise partners, We would like to have a very keen Appreciation and expectation of conversion before we, I'll say, offer the 2024 guidance, that's why we've been evaluating because it dramatically changes the picture. And we don't want to be inaccurate.

Speaker 2

It's really that simple.

Speaker 4

Yes. No, that's helpful context on both sides. Appreciate that. And then just lastly for me, maybe for Tim. The Enterprise segment, can you maybe give us a little A bit more inside baseball and how I mean, who knows what the macro is going to do in 2024, but presumably, I mean, Rates has been beneficial for this business.

Speaker 4

Can you maybe provide a little context about what some of the puts and takes are around rates on the enterprise revenue trajectory, both Just on an absolute basis, but also on the margins.

Speaker 3

Sure. Happy to. So obviously, the rate components where We earn interest income on the deposit balances in that business that flows through at effectively 100% margins, right. It's a straight flow through. That revenue in total interest income across the franchise for the quarter was just under 10,000,000 Roughly 6 of that was attributable to the Enterprise segment.

Speaker 3

So if you took the balance of the revenue in Enterprise, A lot of that still flows through very high margins as well, right. To Tom's point, you have a high percentage of that revenue is Monthly recurring revenue that's not volume or transaction dependent. So it is highly recurring, highly valuable revenue stream That now is just north of 50% of our gross profit. So I think while we've got some weight to the interest income, I think we're very Pretty balanced with the other types of fee income we're generating across the business.

Speaker 4

Great. Perfect. I appreciate you guys. Sorry, go ahead.

Speaker 2

No, no. I would submit to you as well, just on that topic, we're still early innings In taking that capability and pushing it into the SME vertical.

Speaker 4

Right.

Speaker 2

Right. So So there's

Speaker 4

a lot of volume growth opportunities still you would say, just kind of regardless of where rates are?

Speaker 2

Yes. That's exactly right. The other thing I would just note about it in the way we're positioned in that segment, we have a lot of assets That have come on the platform or call it a lot of partners that have come on the platform that Let's just say a decline in rates would indicate some probably economic softening, Which would further increase adoption. So So there's some more points

Speaker 4

that people levers to it. The rate benefit might not be as great, but it's not necessarily like a dollar for dollar drop if that's the case.

Speaker 2

That's right. Because you'll just You'll see some more onboarding trends that would increase. And then like I said, we're still early innings in just the rollout to the other segments Of the embedded financial tools and their capabilities, so which is look, just Going back to your initial question about guidance, right? We want to get some adoption expectations and trends, Which would give us better insight as to how we want to think about those metrics for 2024.

Operator

Got it.

Speaker 2

But I'll just say, our current guidance is, I'll say, it's built for failure, not successful.

Speaker 4

Makes sense. And I appreciate you guys taking all my questions. I'll let someone else jump in, but thanks a lot.

Speaker 3

Thanks, Mike.

Operator

The next question is from Hal Goetz of B. Riley Securities. Please go ahead.

Speaker 5

Hey, good morning, guys. It's really good quarter and interesting commentary. Really like to peel back on plastic. It really seemed to have But a huge benefit to the B2B segment and you guys broke even in that segment. And I want to delve in because the Classiq was a company to went bankrupt.

Speaker 5

So you quickly gotten this whole segment to basically breakeven. I want to know what are What are the things you guys did to make that happen?

Speaker 3

Sure. Hi, Al. It's Tim. I'll jump in on that. So Yes.

Speaker 3

I think as we indicated last quarter, we expected to get that business to cash flow profitability and EBITDA Profitability in the Q1 of 2024, I would submit that we're running ahead of that pace given some of the actions we've taken and a lot of it is The ability to bring companies like Plastic and others into the broader Priority franchise and We use the term operationalize some of the business and find efficiencies across the infrastructure and the team we have in place. So We've been able to do that, really reduced a lot of the operating costs in that business, so far. We haven't Really ramped up the marketing spend and the go to market for that business yet. So there might be a little bit of increase in cost in the business in Q4, but Nominally so, but I think we're very pleased with the effort so far from a cost standpoint. And then on the revenue side of the equation, There's still a lot of levers to be pulled.

Speaker 3

We haven't fully pulled all the levers that we expect to in that business to really drive the top line growth. But even what I would call somewhat baseline revenues that we had in Q3, we've got that business to effectively almost breakeven EBITDA.

Speaker 5

Terrific. And then on SMB, thanks for the color on what it would have looked like excluding The loss of the transition of the reseller, Is it safe to say we should think about this as being kind of a headwind through Q2 of next year? Is it where you first started feeling those effects? Is that the I would say is there or is there more volume to come off and then or is it completely transitioned at this point?

Speaker 2

Hey, Al, a couple of things just to clarify. We didn't lose the reseller. They remain a reseller. And there I would submit their boarding trends have certainly stabilized to increase. Stabilized, yes.

Speaker 2

They were going through a diversification, which by the way, and I mentioned this previously, We wouldn't we couldn't blame them for it. It was, given their evolution, it made some sense. That being said, what we have seen is a considerable increase of adoption of our reseller community. We've already signed 116 new resellers On this year through the 1st 9 months. That would compare with a full year last year of 70.

Speaker 2

So again, coming back to this collects what I'll call is now collect store borrow and send capability That our resellers benefit from with Priority, the adoption has been very, very strong With folks just recognizing your portfolio is worth more a priority. It's just a fact because there's more ways To help your customers and generate fees off things they're doing every day Less efficiently with other parties like pay their bills, Store their money, borrow money, maximize our working capital, those types of things. So, we're actually On our newer agreements, we're just seeing the benefit of better margins.

Speaker 5

Great. Terrific. Thank you.

Speaker 3

Yes. And Hal, just to me adding on to that, just to your question on the impact for the next couple of quarters. I think if that business continues at its current rate, we'll definitely see some headwind in Q4 and into Q1 of next year. That will moderate certainly into Q2 of next year, but I think the profitability impact of that, as I've mentioned in our prepared remarks, is Somewhat limited. So I think it was more of a revenue impact.

Speaker 3

Obviously, you've seen us increase EBITDA guidance. So we're reflecting the impact of both of those in our guidance for the year.

Speaker 4

Thank you.

Operator

The next question is from Brian Kinstlinger of Alliance Global Partners. Please go ahead.

Speaker 6

Great. Thanks so much for taking my question. So you've been adding 12,000 merchants per month for the last two quarters from the 14,000 to 15,000 before the change of this reseller. As you look at the size and capabilities of your new resellers, I missed the number, maybe you could give it again that were added recently. Do you expect to get back to that 15,000 or above?

Speaker 6

As you look at those new resellers, will you be staying in your lanes with I mean, do they focus in the same verticals or are they bringing on Some different verticals that you're not quite as experienced in or one or does it change the risk profile at all?

Speaker 2

Sure. Let me just comment on a few things and then maybe we can Clarify the math a little bit. So first off, composition, these are actually they're just higher margin resellers Then, let's say related to the merchant migration that occurred with the current reseller. It's important to note as far as the what we'll say the boarding trends which you referenced, Those are actually quite similar. That hasn't really changed much.

Speaker 2

The net impact you're reflecting is a result of the migration Of the reseller and those merchants, it's the net impact of the new merchants added And the merchants that were migrated to their alternative platform. Does that make sense?

Speaker 6

Yes. So what you're saying is Merchants are leaving as opposed to you're not acquiring as many because of the reseller not bringing more to you. It's more of a migration issue.

Speaker 2

Yes, exactly. So it's existing. So you're seeing the net impact lower. Yes, exactly. Exactly.

Speaker 2

So the but the boarding trends each month Are pretty stable with where they've been historically.

Speaker 6

Okay. And then as you look at these, can you give the reseller number you added again? And do you expect that to accelerate the merchant count then from the 14,000 or 15,000 that you're probably at Adjusted for that reseller?

Speaker 2

Remains to be seen. We think there will certainly be a modest impact upward. It's 116 that have been added Year to date.

Speaker 6

And that was 70 last year for the full year, is that what you said?

Speaker 2

70 for the full year. Yes.

Speaker 4

Got it. Okay.

Speaker 6

Okay. Thank you.

Speaker 2

And look, I would submit to you, Brian, the more impactful thing The thing that we're focused on with our resellers is the recognition of, guys, there's just more opportunity just within your existing merchant base, Right. There's these opportunities to harvest that. No one's providing these customers. Bill pay, Opportunities for vendor spend management where they can make incremental revenue, Better optimize their working capital. Use Priority's tool to accelerate their cash flow by Using our Passport financial platform.

Speaker 2

What that actually does for people, Brian, put a fine point on it, so You can appreciate this at a kind of a more genetic level. Customers that are on our gateway Have their funds reflected in their Passport account in 5 minutes or less. If you're Think about that if you're running a restaurant on the weekend. More often, if you're on a weekend like in a traditional setting, you're not seeing that money for 2 to 3 days, Right? Because the bank is not open on the weekend, but priority is.

Speaker 2

So we're able to give people access to their money and ways to use it to pay vendors and negotiate better terms that are really meaningful, In this economic environment, and that's where we're going. Like I said, we call it a unified commerce experience. That's what customers expect now. And you add to that the ability to take that money and push it out to a salon worker On a Passport account and or push the tips out to your servers on a Passport account and now they can go out and spend and generate additional Kind of interchange revenue that comes to everyone in that ecosystem. It's just a different model.

Speaker 2

And it's a FinTech model. It's not It's on a merchant acquiring model. And that's a big part of the message we're trying to get people to recognize. It's a different machine. To Hal's early question, it's why we synergize things like plastic exceedingly well, exceedingly quickly.

Speaker 2

We're built to optimize the performance of software and payment assets. And the results speak for themselves. We can point you at other examples, but we do it well because we're very intentional about it. And this company, If I could say it as purely as this, it's like we just have something to prove. And everyone in here thinks that way.

Speaker 6

Great. Thank you.

Operator

The next question is from Natasha Otten of DGA.

Speaker 7

Hi, good morning. You mentioned that the gross margin decline in the B2B segment was related to the addition of Plastics how they need to report their financials differently from a GAAP standpoint compared to the rest of the B2B business. Could you please explain that further and why it's treated differently? Thank you.

Speaker 3

Sure. Hi, Natasha. Yes, I started to explain that last quarter as we acquired plastic and some of the different GAAP requirements. But I've got the benefit of sitting here next to Rajeev Kumar, who's our Chief Accounting Officer, who does a fantastic job for us. So I may let him try to answer that a little bit better this quarter and see if we can Yes.

Speaker 3

Dispel some of the other concerns out there in the market on that those gross margins.

Speaker 8

Thanks, Tim. So Plastic, the business model is that They are merchant of the records in the transactions where they are accepting payments. So they collect the gross fee as a principal And then they pay interchange as if like card networks are their service providers. And that is why GAAP requires in that scenario that revenue be recognized on gross and all the interchange payments should be recognized as cost of services. Whereas if you compare that against our merchant acquiring business, There we collect fee from the customers of merchant on record and then we settle them on their behalf.

Speaker 8

And therefore, they are not our fee, they are not the interchange It is not our expense and therefore we have to do that netting that we do. So hopefully that answers the question. The real difference is that Plastic is a merchant of record in all the transactions that they are processing and therefore we are required to record those revenue at the gross basis.

Speaker 3

Yes. So Natasha, the net effect there is that the margins for the plastic business Look lower, but on a transaction basis, the revenue as we would think about it maybe apples to apples to Other parts of our business, gross profit more approximates the revenue of plastic if it was looked at the same way as the rest of our business?

Speaker 4

That's correct.

Speaker 7

Thank you both.

Operator

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

Speaker 6

All

Speaker 2

right. Well, I hope everyone has an excellent weekend. I want to just thank everyone for taking the time to follow our story, Learn more about where we're headed as a business. We look forward to continuing to deliver for our investors. And rest assured, we got a very dedicated team that hopefully it's It's starting to be very clear to folks, are laser focused on performing.

Speaker 2

So thank you, everyone. Have a great afternoon and a terrific weekend. And given we're not going to speak to everyone for a while, Fantastic Thanksgiving and holidays.

Operator

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

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Earnings Conference Call
Priority Technology Q3 2023
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