Priority Technology Q1 2025 Earnings Call Transcript

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Provided by Quartr
May 6, 2025

Key Takeaways

  • Priority reported strong Q1 results with net revenue up 9%, adjusted gross profit up 14%, adjusted EBITDA up 11%, and adjusted EPS up $0.19 year-over-year.
  • The company reaffirmed its full-year 2025 guidance of 10%–14% revenue growth to $965 million–$1 billion and adjusted EBITDA of $220 million–$230 million.
  • Higher-margin segments continue to drive growth, with B2B revenue up 12% and enterprise revenue up 22%, now representing 62% of total adjusted gross profit.
  • Priority reduced net debt to $887.9 million, resulting in 4.2× net leverage at quarter-end and expects to drop below 4× leverage by year-end at the guidance midpoint.
  • A material weakness remains in the design and operating effectiveness of certain automated controls related to third-party processor data ingestion while remediation efforts continue.
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Earnings Conference Call
Priority Technology Q1 2025
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Operator

Greetings, and welcome to the Priority Technology Holdings Q1 twenty twenty five Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. Should anyone require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.

Operator

It is now my pleasure to introduce your host, Magna Meera, Managing Director, ICR. Thank you. You may begin.

Meghna Mehra
MD - IR(Fintech & Crypto) at ICR

Good morning and thank you for joining us. With me today are Tom Priore, Chairman and Chief Executive Officer of Priority Technology Holdings and Simo 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.

Meghna Mehra
MD - IR(Fintech & Crypto) at ICR

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 Priori.

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

Thank you, Magna, and thanks to everyone for joining us for our first quarter twenty twenty five earnings call. I'll begin today's call by highlighting our aggregate performance that reinforces our consistent revenue and adjusted EBITDA guidance for 2025, before handing it over to Tim, who will provide segment level performance, key trends and developments within each of our business segments and Priority overall. This morning, we reported strong growth in both revenue and profit despite the economic uncertainty over the impact of tariffs and government cuts that emerged in Q1. Summarized on Slide three, Priority had a solid Q1 by every key financial metric, growing net revenue by 9%, generating adjusted gross profit and adjusted EBITDA growth of 1411%, respectively, and increasing adjusted EPS by $0.19 year over year. We ended the first quarter with over 1,300,000 total customer accounts operating on our e commerce platform, up from 1,200,000 at the end of the year.

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

Annual transaction volume increased by $5,000,000,000 to over $135,000,000,000 and account balances under administration improved to $1,300,000,000 versus $1,200,000,000 at year end '20 '20 '4. Tim will walk through the full year 2025 guidance specifics and some of the more noteworthy trends we are seeing within our SMB acquiring, B2B payables and enterprise payment segments later in the call. Based on strong growth trends and continued favorable shift in business mix, I'm confident that the company can achieve 10% to 14% top line revenue growth to a range of $965,000,000 to 1,000,000,000 and generate adjusted EBITDA of two twenty million to $230,000,000 in 2025. This confidence comes from the value of our unified commerce platform, which streamlines collecting, storing, lending and sending money that is delivering revenue and operational success to our customers despite likely headwinds related to lower interest rates and a somewhat murphy macroeconomic environment. Turning our attention to our Q1 results noted on slide four.

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

Revenue of $224,600,000 increased 9% from the prior year. This led to a 14% increase in adjusted gross profit to $87,300,000 and an 11% improvement in adjusted EBITDA to $51,300,000 Adjusted gross profit margin of 38.9% increased 170 basis points from the prior year's quarter. For those of you who are new to Priority, Slide five highlights our vision for Unified Commerce. The Priority Commerce engine is purpose built to streamline collecting, storing, lending and sending money and delivers a flexible financial tool set for merchant services, payables, and banking and treasury solutions to accelerate cash flow and optimize working capital for businesses. I would encourage you to play the short one to two minute videos embedded in the product links on this slide to gain a more fulsome appreciation for their value and how they are being leveraged by our growing customer base.

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

While our financial performance demonstrates that partners consistently choose priority to help power their business, I thought it would be useful for investors to gain a deeper appreciation of why we are emerging as a go to solution provider for embedded finance solutions, using an implementation framework we typically see within our enterprise payment segment. Slide six highlights a typical partner integration to our payments and banking API. Importantly, this framework is consistently applied whether the partner is a sports management software company, a debt resolution provider leveraging CFTPay, a payment facilitator, or a property management technology company. Customers connect and can access all routes for digital payment acceptance, as well as lockbox for checks, create FDIC pass through insured full feature virtual bank accounts, and virtual and physical card issuing, bill payment, and automated payables options at their own pace. Our tightly coupled platform creates two important benefits for Priority's long term prospects.

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

First, it allows our partners to choose your adventure, as we like to say, and evolve their offering to respond to opportunities as we add features in collaboration with their goals. Both parties have a clear line of sight to quantify and access revenue growth opportunities. This creates loyalty and gives us the ability to grow with our partners' businesses. Now second, by maintaining operational workflow consistency across implementation in diverse industry segments, we can clearly identify our operational metrics in key areas like compliance, payment operations, risk, application support, and the like to ensure that we scale cost efficiently. We're committed to meeting our customers where they are and by refining the experience for our partners in order to make working with Priority seamless and easy.

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

Now this vision explains why we've been able to continually transform Priority into a high performing payments and banking fintech with consistently strong recurring revenue prospects. Our customers and current market conditions reinforce our belief that systems facilitating payments and banking solutions to accept and distribute funds in multi party environments will be critical as businesses put greater demands on software and payment solution providers to unlock value in existing and developing channels. At this point, I'd like to hand it over to Tim, who'll provide further insight into the health of our business segments, along with current trends in each that factored into our first quarter results and confidence for sustained performance in 2025.

Tim O’Leary
Tim O’Leary
Chief Financial Officer at Priority

Thank you, Tom, and good morning, everyone. I'll start on Slide eight. As Tom mentioned, we had strong financial performance across the business in the first quarter, and the Priority Commerce Engine continues to generate high growth in our higher margin operating segments. I'll go into more detail on the segment results, but B2B revenue grew over 12% and enterprise revenue grew over 22 on a year over year basis for the quarter. That growth has resulted in adjusted gross profit from our B2B and enterprise segments now representing 62% of our total.

Tim O’Leary
Tim O’Leary
Chief Financial Officer at Priority

The growth in those higher margin segments also allowed for overall margin expansion as adjusted gross profit margins improved by over 170 basis points from Q1 twenty twenty four. The continued shift in our business mix also contributes to the highly visible and recurring nature of our business model as nearly 62% of adjusted gross profit in Q1 came from recurring revenues that are not dependent on transaction counts or card volumes. Moving out of the segment level results and starting with the SMB segment on Slide nine. SMB generated Q1 revenue of $151,700,000 which is $7,700,000 or 5.3 percent higher than last year. Day count for the quarter compared to last year had an approximate 2% drag on the growth rate.

Tim O’Leary
Tim O’Leary
Chief Financial Officer at Priority

SMB's revenue growth was a combination of strong 10% growth in the core portfolio, partially offset by the continued attrition of historical residual portfolio purchases, along with risk pairing and specialized acquiring in advance of certain network program management changes being implemented that we believe will benefit us in the future. Total card volume was $17,700,000,000 for the quarter, which is up 3.4% from the prior year. Again, day count also had an impact on volume growth given fewer processing days in Q1 of twenty twenty five. From a merchant standpoint, we averaged approximately 178,000 accounts during the quarter, up modestly from 177,000 in Q1 of twenty twenty four, while new monthly boards averaged 4,100 during the quarter compared to 4,300 in Q1 of last year and 3,700 in Q4. Adjusted gross profit in SMB for the first quarter was $33,100,000 which is 3.9% higher than last year's first quarter.

Tim O’Leary
Tim O’Leary
Chief Financial Officer at Priority

Gross margins of 21.8% in the quarter are down 30 basis points from last year, but sequentially increased almost 130 basis points from Q4 as we recovered certain credit losses during the quarter that were charged off in early twenty twenty four. On a year over year basis, margins were impacted by the combination of reseller mix, lower specialized acquiring revenue and the attrition of historical residual portfolio purchases. Lastly, for SMB, adjusted EBITDA was 25,700,000.0 which is up 2.7% from last year. Adjusted EBITDA growth lagged adjusted gross profit growth in the quarter because of increased salary and benefits along with higher software expenses related to the previously discussed migration to the public cloud, which will convert certain CapEx to OpEx, but provide longer term benefits to the company. Moving to B2B, revenue of $23,900,000 was an increase of 12.1% or $2,600,000 from the prior year.

Tim O’Leary
Tim O’Leary
Chief Financial Officer at Priority

Our buyer funded revenues grew by 7.1%, while supplier funded revenues grew by 35 on a year over year basis. To clarify, when we use the terms buyer funded and supplier funded, we're referring to who is paying the interchange or credit card related fees. In the supplier funded model, or what we've historically referred to as CPX, the supplier accept the card payment net of the interchange discount because they want to receive the payment faster while receiving the funds electronically with reconciliation back into the GL and without the cost of handling paper checks. And the buyer funded model, which came by the plastic acquisition, the buyer pays the card fee because they want to utilize existing credit card capacity to extend their payables terms and optimize their working capital while generating cash back or rewards points for using their cards. The buyer funded businesses increased focus on enterprise level customers and large bank referral partners showed success in the quarter as companies seek to optimize their working capital and streamline their payables operations in the face of rising input costs, whether resulting from general inflation or from increased tariff rates.

Tim O’Leary
Tim O’Leary
Chief Financial Officer at Priority

Adjusted gross profit in B2B increased to $7,300,000 in the quarter, which is a 17.8 increase over the prior year. For the quarter, gross margins were 30.5% or 150 basis points higher compared to 29% in the first quarter of twenty twenty four. The B2B segment produced $3,500,000 of adjusted EBITDA during the quarter, which was a $1,800,000 or 101% increase over the comparable period in 2024. The acceleration of adjusted EBITDA growth compared to adjusted gross profit was driven by strong operating leverage in the segment, including a 14 reduction in operating expenses on a year over year basis. Moving to the Enterprise segment, Q1 revenue of $50,100,000 was an increase of $9,100,000 or 22.2% from the prior year.

Tim O’Leary
Tim O’Leary
Chief Financial Officer at Priority

Revenue growth was driven by continued strong enrollment trends and an increase in the number of billed clients in CFTPAD, combined with an increase in the number of integrated partners in organic same store sales growth with those existing partners. Higher account balances in CFTPAD and Passport were able to largely offset the impact of lower interest rates in the quarter. As a result of those factors, adjusted gross profit for the Enterprise segment also increased by 22.2% to $46,900,000 while adjusted gross profit margins remained at 93.6%. Adjusted EBITDA for the quarter was $42,400,000 an increase of $7,700,000 or 22.2% from the prior year's first quarter. Overall profitability in enterprise was driven by continued strong performance in CFTPay, which offset investments made in newer verticals that we believe will provide the next leg of the growth stool for the enterprise segment.

Tim O’Leary
Tim O’Leary
Chief Financial Officer at Priority

Moving to consolidated operating expenses, salaries and benefits of 25,800,000.0 increased by 3,600,000.0 or 16.4% compared to Q1 of last year. And SG and A of 15,100,000 increased by 4,100,000.0 from Q1 of twenty twenty four. Higher SG and A expenses were driven by increased spend on software, including the continued public cloud migration, higher marketing expenses in the quarter and certain non recurring legal and other expenses, including those related to the secondary equity offering we closed in January. Moving to the capital structure and liquidity overview, debt levels during the quarter declined to 935,500,000.0 following a $10,000,000 prepayment of the term loan during the quarter. We ended the quarter with $117,600,000 of available liquidity, including all $70,000,000 of borrowing capacity available under our revolving credit facility and 47,600,000.0 of unrestricted cash on the balance sheet.

Tim O’Leary
Tim O’Leary
Chief Financial Officer at Priority

For the LTM period ended March 31, adjusted EBITDA of 209,200,000.0 represents $4,900,000 of sequential quarterly growth from $204,300,000 at the end of Q4. This growth in adjusted EBITDA combined with net debt of 887,900,000.0 resulted in net leverage of 4.2 times at quarter end, which is down from 4.3 times at 2024 year end. As mentioned on our last earnings call, we will continue to focus on opportunities to reduce leverage on our balance sheet, while also remaining nimble in the face of inorganic growth opportunities in this market. If you were to use the midpoint of our 2025 adjusted EBITDA guidance, we would be under four times leverage by year end based on today's net debt balance. This is the first quarter since I joined Priority where this page doesn't include mention of the preferred stock dividend.

Tim O’Leary
Tim O’Leary
Chief Financial Officer at Priority

With the redemption in full of the preferred stock in 2024, I'm happy to report that all of our net income now flows to the benefit of our common shareholders, which resulted in adjusted EPS of $0.22 for the quarter. That compares to $0.18 in Q4 twenty twenty four and $03 in Q1 of last year. As Tom mentioned, based on our Q1 results and our forecast for the remainder of the year, we are maintaining the full year financial guidance that was provided on our Q4 twenty twenty four earnings call. This outlook is informed by the current environment where consumer spending remains stable and interest rate changes remain aligned with current market forecasts. If you compare Q1 results to the full year guidance, the simple math will show that we're not 25% of the way there yet.

Tim O’Leary
Tim O’Leary
Chief Financial Officer at Priority

But our expectation is and has been that we will grow revenue and profits sequentially each quarter as we move through the year. Before I turn the call back over to Tom, I wanted to provide an update on our progress in the remediation of the material weakness related to the design and operating deficiencies and certain automated controls around ingestion and validation of third party processors data. As noted in our 10 ks and comments on our last earnings call, the material weakness did not result in a restatement or any change to our consolidated financial results. The Board of Directors and management team are actively working to remediate the automated controls efficiency. As of today, the team has made substantial progress in those efforts and we are testing the existing data translation controls in a non production environment.

Tim O’Leary
Tim O’Leary
Chief Financial Officer at Priority

Once we are certain those controls meet our internal standards and those of our external auditors, we will move them into a production environment for formal certification. To be clear though, the material weakness will remain intact until we complete our fiscal twenty twenty five audit process and receive a formal opinion from our external auditor. With that, I'll now turn the call back over to Tom for his closing comments.

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

Thank you, Tim. Before concluding, I want to speak to Priority's market positioning as consumers, businesses and investors reconcile the current economic picture. 0.3% decline in U. S. GDP during the first quarter.

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

Consumer spending, which accounts for two thirds of GDP, grew by only 1.8% in the quarter from a healthy 4% exiting 2024. April's '30 '2 percent decline in consumer sentiment to levels not seen since the 1990s recession. It's clearly a challenging environment, but candidly, not one that has surprised us. Entering 2025, we believe the post election optimism for economic growth required near perfect execution, and we were more likely to experience measures of volatility and uncertainty. Therefore, our goals were basic, to gain market share in the acquiring segment as cyclical challenges we anticipated emerged while continuing to strengthen our countercyclical assets, including automated payables and CFT Pay, and investing efficiently in new verticals with large TAMs that are still early in the adoption of integrated payment and banking solutions.

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

In fact, during our twenty twenty four year end earnings call, we reflected that there was likely to be growing urgency for working capital solutions among U. S. Businesses as tariffs took shape and that our CFTPay business was well positioned for growth by assisting the increasing population of stressed consumers find financial wellness through debt resolution. As our results demonstrate, we executed in each regard. While the card brand networks and large scale issuing banks reported 3% to 5% volume growth, our core acquiring channels produced 10% organic revenue growth.

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

Meanwhile, our countercyclical segments grew 1222%, respectively, despite investments for the future in emerging integrated verticals like payroll and benefits, real estate and construction technology, and sports entertainment, where collecting, storing, and sending money are an important part of the value chain, would cause a modest drag on our results while they scale. Now, I offer these observations to our stakeholders with humility and recognition from our teams that success must be earned each day with relentless pursuit of execution, and openness to critique and thorough evaluation to avoid complacency, particularly as economic conditions can further erode. We're hopeful that our consistent results in the first quarter of twenty twenty five and a unified commerce vision that has delivered five year compound annual adjusted EBITDA growth of 19.8% through the end of twenty twenty four will convince our current and future stakeholders that Priority routinely stays ahead of the market trends, and its technology, operations and decision making are geared for the future of payments and banking. To put it simply, we're built different. As always, I want to thank my colleagues at Priority who continue to work incredibly hard to deliver industry leading results.

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

Your commitment and dedication to improving everything we do is clear, providing our partners and customers with a constant reminder that they made the right decision to partner with Priority. Last, we continue to appreciate the ongoing support of our investors and analysts and for those in attendance who are new to Priority for taking the time to participate in today's call. Operator, we'd like to now open the call for questions.

Operator

Thank you. We will now be conducting a question and answer A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. The first question is from Hal Goch from B. Riley Securities. Please go ahead.

Hal Goetsch
Managing Director at B Riley Financial

Hey, thanks guys. Quick question on expenses. SG and A dollars and salaries and benefits rose about $5,000,000 in spending sequentially. And I know you called out the secondary offering and the cloud migration. Could you parse out some of those numbers for us to let us know if you can, the details of how much that cloud infrastructure is different than a year ago and any other kind of expense variances you can share with us.

Tim O’Leary
Tim O’Leary
Chief Financial Officer at Priority

Sure, thanks Al. If you look at the SG and A in particular for Q1 of this year and compare that to last year, if you normalize for the non recurring items, right, obviously we had about 2,200,000 this year on non recurring items and about 800,000 last year. So if you adjust for those, SG and A was up about 26% year over year. Another million or so of that is related to the continued migration from the private hybrid cloud to the public cloud, you'd have to adjust for that as well. That was really the large part of the drivers there in SG and A and then on salary and benefits side, a lot of that is driven by some of the headcount additions last year that obviously didn't have a full year impact into the financials in Q3 or Q4 of last year, but you've got the full quarter impact of that this year.

Tim O’Leary
Tim O’Leary
Chief Financial Officer at Priority

I think going forward though, obviously we've maintained our guidance and feel comfortable with where we sit from a overall margin standpoint and some of the trends on the expense side and continue to look at efficiencies especially across the technology part of the team and things we can utilize automated tools for. So we'll continue to evaluate those opportunities to manage expenses from here.

Hal Goetsch
Managing Director at B Riley Financial

I have one follow-up. I think you mentioned the number 62% think twice I think or me. You said 62% of your gross profit dollars now are coming from B2B and enterprise. Is that right? I want to make sure I heard that right.

Tim O’Leary
Tim O’Leary
Chief Financial Officer at Priority

It is. And actually this quarter of the numbers I referenced were 62%. So probably a little confused with the exact same figure, but the gross profit coming from B2B and enterprise aggregates to just over 62% for the quarter. Then the other figure I referenced at 62% is the percentage of our adjusted gross profit that comes from recurring revenues in the quarter. Okay.

Hal Goetsch
Managing Director at B Riley Financial

And that includes some, you know, just recurring revenues in SMB?

Tim O’Leary
Tim O’Leary
Chief Financial Officer at Priority

It does. Includes, yes. That's on a consolidated basis. That's right.

Hal Goetsch
Managing Director at B Riley Financial

And the last one before we turn it back and get back in the queue. You mentioned a pretty interesting signature win with the Minnesota Wild. That's a fairly large enterprise. Could you share with us your thoughts on how you the sales cycle to that, how you won that contract and what were some of the reasons why you're picked over others that are active in the stadium space? Thanks.

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

Yeah. Sure, Hal. I do want to mention one other thing that you noted on the expense side. So the purpose of migrating to the public cloud also allows us to position for some engineering efficiencies. Just it it normalizes, you know, the the engineering work that gets done.

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

There's just a broader set of folks that operate in that environment. So we do expect you'll start to see some of that efficiency flow through in following quarters on the OpEx side. As it relates to the press release on the Minnesota Wild, it was pretty, I think, explanatory when you looked at their Chief Revenue Officer's comments. Not only do we step in and make, you know, ticketing more efficiently, the executed the other areas are really implementing the banking transparency and the acceleration of cash flow that we're able to help manage. So because we've combined payments of banking on a single platform, think about it this way, every single area of revenue that flows through at the stadium level or, you know, anything attached to the enterprise, we can, instead of all that going into a single settlement bucket, we can parse it out by you know, think of it like a clearing account.

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

As that money flows in, reconciliation of all the batches are automated because we see the batch come through, we see the deposit going to the account, and then it can immediately and efficiently sweep out into their operating bank account. Often, and this may surprise you, but these organizations, sports in particular, just they've exploded over the past years in valuation, but many of them are still small market teams managed in kind of by a smaller group of personnel. So money that's sitting in those systems may not get invested in overnight funds or things like that. So bringing tools that allow them to optimize their working capital, get that money to work quickly, which we're able to do within our systems, Things like that are, you know, are are are the reasons why we want it. It's just a more complete tool set to help accelerate cash flow, optimize working capital.

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

That's how we go to market. That's what resonates. And and that's true whether a business is, you know, a professional sports franchise or a small business around the corner.

Hal Goetsch
Managing Director at B Riley Financial

Yeah. Very good. One last thing. Could you comment on Q1 this year versus last year had one less day and Easter was several weeks into April versus in March a year ago. Was that one less day bear any impact on volume and float and income and revenue in that any manner?

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

Did. I'll let him speak to the specifics, but it also, you know, I would also add in you had the, you know, had, President Carter's funeral, which, you know, we saw some weird influence there, in the way it affected volumes. So there's a few abnormalities from the historical in this quarter.

Tim O’Leary
Tim O’Leary
Chief Financial Officer at Priority

And how it does, obviously your intuition is right. So one less day this year compared to Q1 of last year. If you look at just our daily revenue, which it impacts SMB the most. I mean the daily revenue there, it's about a million 6 million 7, right? So it's got an impact.

Tim O’Leary
Tim O’Leary
Chief Financial Officer at Priority

And then if you look at just Q4 to Q1, there's two days of difference between Q4 and Q1. So that has an impact on us as well.

Hal Goetsch
Managing Director at B Riley Financial

All right, terrific. Thanks guys.

Operator

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

Bryan Bergin
MD - Equity Research at TD Cowen

Hey, guys. Good morning. Thanks for taking the question. First, I appreciate the outlook for growing overall revenue and profit sequentially as you go through 2025. Are there any important considerations as you get into the segment forecast on growth and profit as you go through 2Q and the balance of the year?

Tim O’Leary
Tim O’Leary
Chief Financial Officer at Priority

I think the biggest potential impact that would affect maybe one segment more than others is just if there's any major shift in rate curves and you think about where interest rates go and how that impacts our balances and the income we generate on permissible investments. At this point, we've taken the latest estimates we have from the other forward curves and applied that against our three plus nine forecast and ultimately obviously roll that into how we feel about the full year guidance. But if there's any meaningful shift in rates, which look at this point, we've assumed three cuts this year to consistent with what we're seeing in the Fed doll plot and some of the curves. So if that changes one way or the other then that could have an impact certainly on the high margin interest income we generate on the permissible investments.

Bryan Bergin
MD - Equity Research at TD Cowen

Okay, makes sense. And then within SMB, so 10% growth in the core ex the residual attrition and the risk pairing. Can you scale just the impact between those two categories? How should we be thinking about the remaining size of the business that may face incremental risk pairing as you go forward?

Tim O’Leary
Tim O’Leary
Chief Financial Officer at Priority

Sure, so the majority of that impact, probably a two to one plus ratio is more of the risk pairing than it was the runoff from the historical residual purchases. Yeah, I don't think we're going to expect to see a lot more on the risk parent side. We feel like we're in a pretty good position there overall in that portfolio and really getting in front of some of the potential changes that Tom can talk about. But overall, think it's all been factored into some of our guidance and the cadence of the quarterly estimates as well.

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

Yeah, Brian, just to give you a little bit of granular context, there's some network adjustments that are occurring within specialized e commerce space. It's, it just you know, nothing more than putting some additional reporting burden and, you know, really the the way the networks will measure performance is gonna become a little bit more stringent. In advance of that, we took some actions to to reduce our footprint with a belief that a number of players who've participated in the space historically are actually gonna be forced to to exit, because it just it's gonna compress their economics to a point where it won't make sense. So we expect that to be to our benefit over the long term. And we're just kind of positioning for that in advance of those realities, just getting reconciled by the market participants.

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

So that's why we try to get ahead of a few emerging opportunities.

Bryan Bergin
MD - Equity Research at TD Cowen

Okay, understood. Thank you, guys.

Operator

The next question is from Tim Switzer from KBW. Please go ahead.

Tim Switzer
Vice President at Keefe, Bruyette & Woods (KBW)

Hey, good morning. Thanks for taking my questions. Given your exposure to consumer spending, small businesses, I thought you guys might have a pretty good sense of how those customer segments have reacted to the tariffs and economic uncertainty since Liberation Day. Have you guys seen any notable changes in behavior or anything like that?

Tim O’Leary
Tim O’Leary
Chief Financial Officer at Priority

Nothing material yet Tim. Obviously Liberation Day came in after the quarter so we haven't really seen a dramatic shift in anything and if we continue to look at just recent volume trends here even after the quarter, I think relatively consistent and I think some of this goes to the mix of customers we have as well. If you think about our overall portfolio, we feel like we've got some good resilience in that portfolio. We certainly have restaurants, you'll make up a good portion kind of mid to high teens percentage of the portfolio which could have an impact. But if you think about the the retail component of our end market, well that's you know high 20% range as a percentage of the portfolio.

Tim O’Leary
Tim O’Leary
Chief Financial Officer at Priority

If you break that apart even further and look at the mix within that retail component, you've got package stores or liquor stores, you've got auto parts stores, you've got other end markets that have more resiliency. And then we also have obviously meaningful components in professional or business services, including law firms, doctor's offices, other areas that are more recession resistant. So we'll see some impact, but we think we're well positioned for what we expect to happen in the consumer spend cycle.

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

Okay. Other thing I would note actually, as you look at some of the available research that like some of the banks are publishing around, I'll call it small business owner sentiment, businesses that are above $05,000,000 of revenue are largely reporting kind of a limited, if any, concern. No substantive drop off. Our average customer is doing just shy of $40,000 a bank card a month. So you can do the math.

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

They're larger, healthier customers. It's our go to market to utilize distribution that focuses on the upper kind of segment of small business. So that also, I think, contributes to our consistency.

Tim Switzer
Vice President at Keefe, Bruyette & Woods (KBW)

Okay. Got it. That's that's helpful. And then within your enterprise segment, what kind of impact do you think some of this uncertainty or recession would have on the debt resolution business? Like have you started to see a tick up in activity there?

Tim Switzer
Vice President at Keefe, Bruyette & Woods (KBW)

I think there could be a lot of opportunities with some of the layoffs related to doge and maybe even as student loan payments are now being reported credit bureaus and, you know, the potential for some students to be kicked off in the repayment plan, we see no rising payments there. It's gonna probably pressure a lot of consumers with that.

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

Yeah. I'll tell you, couple things we're looking at, you know, just as leading indicators. Obviously, you know, the the headlines are, you know, are are instructive. When you look at the amount of seriously delinquent, you know, unsecured credit card debt, it's it's increasing pretty consistently. So, you know, fundamentally, we think there's going to be a great opportunity for CFT PAY to help assist stressed consumers towards resolution and workout.

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

Certainly, the numbers are supporting that. Historically, and Tim can speak to some of the curve of that business or the revenue curve. But there's generally about a six month lag where we start to see an increase in throughput on resolution to a backup in the economic environment. Because consumers, one, you've got that ninety day delinquent window before you start to catch the attention of the card issuers. And consumers fight.

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

The consumers engage in this process. They have jobs. They have to in order to be engaged in a resolution and work out. So they were at one time healthy consumers that were able to get 30 plus million of unsecured 30 plus thousand, excuse me, of unsecured debt. Their ability to pay is just has been compromised in the near term.

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

So we think there's going to be a growing number of consumers that fit that profile. And it should give us some opportunities in the months to fall.

Tim Switzer
Vice President at Keefe, Bruyette & Woods (KBW)

Okay, got it. That was really helpful. If I could have one more. It seems like there's been an opportunity for you guys in the embedded finance space largely related to some of the disruption in banking as a service relationships. You can call out the Evolve and Synapse situation.

Tim Switzer
Vice President at Keefe, Bruyette & Woods (KBW)

I believe another middleware provider, Solid, also recently filed for bankruptcy. What kind of opportunities has this created for you guys with your embedded finance and ledgering products?

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

Been a target rich environment. So we've been very focused on some of the businesses that were on those platforms and feel like we'll continue to get our fair share of wins. And you'll see those manifested over the coming months as they transition from just environments that just less stable. So that's I think you can appreciate, we've been very intentional about the differentiation of our platform, the stability of our bank partners, kind of building with a long term purpose in mind, maintaining money transmission licenses so that there's kind of clarity and certainty among our bank partners of the rigor around our compliance. And that's, we're positioned to benefit from the fallout of some of the banking and service providers who are just not viable in the current regulatory environment.

Tim Switzer
Vice President at Keefe, Bruyette & Woods (KBW)

Got it. Very helpful. Thank you.

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

And there was a question that was asked about the potential headwinds and Tim referenced, if interest rates were to decline more than have more than three cuts, right? The offset to that is deposit growth. So we are seeing positive trends in deposit growth. A driver of that is are the segments outside of our CFT Pay application and other segments within enterprise, some of which are these vast providers looking for a more stable home.

Operator

The next question is from Jacob Steffman from Lake Street. Please go ahead.

Jacob Stephan
Senior Research Analyst at Lake Street Capital Markets, LLC

Yeah, thanks. Just a quick question. A lot of talk about countercyclical payments here. I mean, is it possible for you guys to kind of parse out maybe some exposure to some of these end markets you referenced like doctors' offices, lawyers, either in terms of like a dollar volume or revenue or even adjusted gross profit.

Tim O’Leary
Tim O’Leary
Chief Financial Officer at Priority

We can from, I mean, just if think about volume, Jacob and you look at kind of the comments already made, as an end market is kind of mid to high teens, call it 15% of our volume. You know retail starts to get up into the high 20% range and then within that there's obviously sub sectors that as I referenced have some resiliency so there's a good mix there of I'd say half of that volume is in end markets that have a good level of recession resistance. Legal services and doctors offices you know broader professional services you know that's up north of sixteen-seventeen percent of the portfolio. You start getting down into other smaller sub sectors, you know real estate in those areas is called 5%, then everything from there really it trails off, You've got things like education, you know, 3%, public administration, sub 3%. So really the ones I've touched on already are the larger end markets and then pretty diversified from there.

Jacob Stephan
Senior Research Analyst at Lake Street Capital Markets, LLC

Okay, very helpful. And then do you guys have any exposure to kind of enabling these tariff payments by companies in the government?

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

I don't know that I would call it exposure. In fact, where I was gonna transition your question, because I I I think the the observation is a good one. We see kind of a countercyclical opportunity is is in b two b, where you are seeing the influence of tariffs and some of what buyers in The US have not prepared for. They're using our card strategies, working capital strategies in our B2B segment to help them manage through that. That's why you're seeing pretty outsized growth in relative to consumer on the B2B side.

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

Tim referenced it, plastic volume was up 7%. So our buyer funded, our supplier funded was up 35%. So this B2B automated payables suite of tools is, has meaningful countercyclical aspects.

Jacob Stephan
Senior Research Analyst at Lake Street Capital Markets, LLC

Okay, that's helpful. Just last one for me. Obviously, Minnesota wild ticketing nice win. I was hoping that they get to the Western Conference semifinals for you guys, but maybe help us think about kind of the difference in contracting with like a venue like the Xcel Energy Center, which is owned by the City of St. Paul.

Jacob Stephan
Senior Research Analyst at Lake Street Capital Markets, LLC

Do kind of view this as a leading foot in the door towards a much broader opportunity with the wild and, like, organizations?

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

Yeah. It it is. We're we are well positioned to help professional sports franchises optimize their payment environment. And I'll say their payment and banking environment. If you think about that stadium environment you referenced, while it's owned by the city, the team is still responsible for concerts, other other activities within that venue that they're selling tickets within.

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

And they need to account for those discrete properties differently. So having a combination of of flexible payment tools that can, you know, handle them all, but also, you know, do so with, I'll call it, a banking container that can ease their reconciliation and operations and how they recognize that cash, maybe even revenue shares or other payouts that need to occur within it. It's very useful financial tool set that brings them some efficiencies that their core bank providers. And it's not just true of the wild. This is across the board.

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

It's just not what banks do. So that's where we're bringing value to the system. And we have a very healthy pipeline of like minded franchises that we're speaking to about that very approach. So as we get more wins, we'll talk about it.

Jacob Stephan
Senior Research Analyst at Lake Street Capital Markets, LLC

Great. I appreciate it, guys.

Operator

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

Brian Kinstlinger
MD, Director of Research & Head of Technology Research at Alliance Global Partners

Great. Thank you. I just want to make sure I understood. Just under 40% of your revenues from restaurants and retail, just doing the simple math. So I want to make sure I heard you right in this mis slice of business.

Brian Kinstlinger
MD, Director of Research & Head of Technology Research at Alliance Global Partners

Have the volumes or average basket sizes materially changed? It sounds like no, at least since the April.

Tim O’Leary
Tim O’Leary
Chief Financial Officer at Priority

Hey Brian, no major changes to the basket sizes, but I do want to clarify when you say it's almost 40% of our revenue, it's about 40% of the volume in SMB which obviously is meaningless from an overall revenue standpoint. Don't want to

Brian Kinstlinger
MD, Director of Research & Head of Technology Research at Alliance Global Partners

mix.

Brian Kinstlinger
MD, Director of Research & Head of Technology Research at Alliance Global Partners

No, you're sorry. Yep. But the answer is that's right. There hasn't been material changes in those metrics in the SMB segment.

Tim O’Leary
Tim O’Leary
Chief Financial Officer at Priority

Nothing that we wouldn't expect. Obviously, there's some seasonality in certain sub sectors. You think of package stores and certain food stores, right? You're to see a little bit of a bump around the holidays and then that tails off a little bit more and it gets normalized levels in Q1. We saw some of that activity which we expect but outside of that no other real meaningful shift in the volumes you buy end market.

Brian Kinstlinger
MD, Director of Research & Head of Technology Research at Alliance Global Partners

Great. And then the only other question I had from the financial perspective, based on your adjusted EBITDA guidance, what is the anticipated range of free cash flow? And then can you discuss capital deployment priorities for that cash flow?

Tim O’Leary
Tim O’Leary
Chief Financial Officer at Priority

Sure. So I think the overall free cash flow for the year is going to be pretty consistent with Q1, right? So we had some working capital swings in Q1 just given timing of the quarter end. But if I think about cash flow more as an adjusted EBITDA walk down to free cash flow, right? If you take out the cash interest, taxes, CapEx, take out the non recurring expenses, we had about $20,000,000 of free cash flow in the quarter.

Tim O’Leary
Tim O’Leary
Chief Financial Officer at Priority

I think you'll see kind of consistent levels of cash flow compared to EBITDA as we go out through the year. So, know, 80,000,000 plus of free cash flow for the year on that basis. Working capital swings, you know, may impact that a little bit, but that's mostly time related. We don't have a lot of working capital in the business outside of just when the quarter happens to end and it usually normalizes the next quarter as things reverse if it ends mid week versus on a Friday or Monday.

Brian Kinstlinger
MD, Director of Research & Head of Technology Research at Alliance Global Partners

And if 80,000,000 is that number, how much to debt reduction and how much for other purposes?

Tim O’Leary
Tim O’Leary
Chief Financial Officer at Priority

We'll continue to evaluate debt reductions throughout the year. Obviously, we've made a $10,000,000 prepayment in Q1. We'll continue to look at deleveraging over time, but we're also seeing some pretty unique opportunities in this market given some of the dislocation we've seen out there and Tom's referenced a few end markets on prior calls that we have interest in. So we'll remain nimble around capital deployment, but I assure you the team here is very focused on the balance sheet to continue to focus on deleveraging if there's not some other meaningful value enhancing activity out there available to us.

Brian Kinstlinger
MD, Director of Research & Head of Technology Research at Alliance Global Partners

Great, thank you.

Operator

This concludes the question and answer session. I would like to turn the floor back over to Tom Priore for closing comments.

Thomas Priore
Thomas Priore
Chairman & CEO at Priority

Thank you very much. Just want to once again thank everyone for their participation on the call. We appreciate everyone's support. And after any further questions, we'll get back to work. So hope everyone has a great rest of the week. And thanks again.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Executives
Analysts
    • Meghna Mehra
      MD - IR(Fintech & Crypto) at ICR
    • Tim O’Leary
      Chief Financial Officer at Priority
    • Hal Goetsch
      Managing Director at B Riley Financial
    • Bryan Bergin
      MD - Equity Research at TD Cowen
    • Tim Switzer
      Vice President at Keefe, Bruyette & Woods (KBW)
    • Jacob Stephan
      Senior Research Analyst at Lake Street Capital Markets, LLC
    • Brian Kinstlinger
      MD, Director of Research & Head of Technology Research at Alliance Global Partners
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