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Priority Technology Holdings, Inc (NASDAQ:PRTH)
Q4 2019 Earnings Call
Mar 31, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Priority Technology Holdings Fourth Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Chris Kettmann. Please go ahead, sir.

Chris Kettmann -- Investor Relations

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

Before we provide our prepared remarks, I would like to remind all participants that our comments today will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, regarding future expectations about the company's business, management's plans for future operations or similar matters, which are subject to certain risks and uncertainties. The company's actual results could differ materially due to several important factors, many of which are beyond the company's control, including those risks and uncertainties described in the current report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2020.

Any forward-looking statements we make today are only as of today's date and we undertake no obligation to publicly update or review any forward-looking statements. Additionally, we may refer to non-GAAP measures including EBITDA, adjusted EBITDA and earnout Adjusted EBITDA during the call. Please refer to our public filings and disclosures, including those referenced in our press release announcing this call for definitions of our non-GAAP measures and the reconciliation of these measures to net income. We have also provided an accompanying presentation with today's call that will help us more clearly articulate our results and go-forward strategy. With that, I would now like to turn the call over to our Chairman and CEO, Tom Priore.

Thomas C. Priore -- Chief Executive Officer

Thank you, Chris. And thanks to everyone for joining us. Before we discuss Priority's results and path forward, I want to first offer my thoughts and well-wishes to all of you and your families, particularly those who have loved ones in the medical and healthcare community, law enforcement and the military. I hope that everyone is safe and healthy during this incredibly challenging time in our country and the world.

In light of the current environment, on today's call, we will be adjusting our format from previous earnings calls. I'll briefly highlight the extremely strong Q4 and full year results. And then turn it over to Mike who will go into more detail on the performance of each business segment for the quarter and year, overall. Following Mike's commentary, I intend to provide visibility into our Q1 performance in light of the widespread COVID-19 pandemic, how it is influencing Priority and could continue to in the upcoming months.

As you can see in our earnings release, we reported excellent fourth quarter 2019 results, reflecting the fundamental integrity of our business segments and the strong underlying momentum we've seen over the past several quarters. As we work through the impact of the pause in our subscription e-commerce business. Consolidated fourth quarter revenue of $98 million increased 10.7% from the prior year quarter, driven by strong results in the Consumer Payments segment, exceptional growth in the Integrated Partners business and steady performance in Commercial Payments.

Gross profit in the fourth quarter increased more than 15% year-over-year to $31.4 million and adjusted EBITDA of $16.2 million increased approximately 35%. Total merchant bankcard processing dollar volume of $11 billion increased 16.2% over the fourth quarter of 2018. For the full year, consolidated adjusted revenue of $364.1 million which extracts the drag from subscription e-commerce increased $47.6 million or 15% belying the consistent performance of our business segments that generated a 12.7% increase in bankcard processing volume for the year to 43 billion.

Our GAAP adjusted EBITDA reflected this resilience posting a 19.2% increase to $58.9 million, while consolidated adjusted EBITDA came in a touch above $72 million which was ahead of recent full year expectations. All in all, we were excited by the way we wrapped up the year entering 2020 on extremely positive note. With that, I'd now like to ask Mike Vollkommer to provide further insight on our fourth quarter and full year results, with particular emphasis on business segment performance. Mike?

Michael Vollkommer -- Principal Financial and Accounting Officer

Thank you, Tom, and good morning. I'll briefly review the consolidated fourth quarter and full year results before providing detailed commentary on our business segment performance. Our 2019 Form 10-K provides disclosure in parts 1, 2, 11 and 20 that provide detail regarding the impacts on previously reported consolidated segment and quarterly results for the retrospective adoption of ASC 606 revenue recognition standard and restatement for corrections of certain errors.

My comments are based on comparative numbers, reflecting both the retrospective adoption of 606 as well as restatement for corrections. Where I say a non-GAAP measure, you can refer to yesterday's press release that provides a reconciliation of these measures with GAAP. We've also provided supplemental slides to assist with reviewing the results that are available on the IR portion of our website.

Consolidated revenue in the fourth quarter of 2019 was $98.2 million, a 10.7% increase of $9.5 million compared with the fourth quarter of 2018. As discussed in prior calls, fourth quarter year-over-year revenue growth continued to be impacted by the wind down of subscription billing e-commerce merchants, but to a much lesser extent than previous quarters. This e-commerce revenue entirely within the Consumer Payments segment was $1.5 million and $6.8 million in the fourth quarters of 2019 and 2018, respectively. On a non-GAAP basis, excluding this revenue from the comparative quarters, consolidated adjusted revenue increased 18% year-over-year. The supplemental slides on our website illustrate the quarterly wind down of revenue from these merchants.

During the fourth quarter of 2019, this decline bottomed and we have begun to experience year-over-year growth in this sector moving into the 2020 first quarter. Consolidated gross profit in the fourth quarter of 2019 was $31.4 million a 15.1% increase of $4.1 million compared with the fourth quarter of 2018. Our gross profit metric represents consolidated revenue less the cost of services.

Consolidated gross profit margin was 32% in the fourth quarter of 2019 an expansion of 124 basis points from 30.8% in the fourth quarter of 2018. Gross profit as well as income from operations associated with subscription billing e-commerce merchants was $0.7 million in the fourth quarter of 2019, compared with $3 million in the fourth quarter of 2018. And despite the $4.1 million increase in gross profit, consolidated income from operations of $1.1 million in the fourth quarter of 2019 declined by $1.6 million. The decline was driven by a $3.3 million increase in depreciation and amortization, a $2.1 million increase in SG&A and $373,000 increase in salaries and benefits. The $2.1 million increase in SG&A was driven by a $2.8 million increase in certain expenses that we consider non-recurring in nature. These expenses were $4.9 million and $2.1 million in the fourth quarters of 2019 and 2018 respectively. In 2019, these expenses were primarily associated with transitional integration services from YapStone, certain litigation costs and acquisition related diligence expenses. In 2018, these expenses were associated with legal accounting advisory and consulting costs largely associated with the conversion to a public company.

On a non-GAAP basis, excluding both the e-commerce subscription business and the non-recurring expenses from the comparative quarters, consolidated adjusted income from operations totaled $5.2 million in the fourth quarter of 2019, an increase of $3.5 million from the fourth quarter of 2018.

Now let's break this down within the reportable segments. Consumer Payments market-leading technology continues to exceed customer demands for payment and payment adjacent services. Growth in this segment has been fueled by three key strengths, a cost-efficient agile payment processing infrastructure, proprietary product platform, and a diverse and focused distribution engine dedicated to consumer-to-business payments.

Overall, new merchant boarding trends continue to build momentum from the past several quarters and approximately 5,000 per month and portfolio volume attrition remains at one of the lowest rates in the industry.

Consumer Payments revenue in the fourth quarter of 2019 was $87.4 million, a 7.9% increase of $6.4 million compared with $81 million in the fourth quarter of 2018. This improvement was in spite of a $5.3 million decline in revenue from the subscription billing e-commerce segment. When adjusted for this influence, Consumer Payments adjusted revenue of $85.9 million increased $11.6 million or 15.7% from the comparable 2018 period.

Merchant bankcard volume processed in the fourth quarter of 2019 of $10.8 billion grew by 15.1% as compared with $9.3 billion in the fourth quarter of 2018. Merchant bankcard transactions of $129.2 million in the fourth quarter of 2019 grew by 13% compared with $114.3 million in the fourth quarter of 2018. Average ticket of $83.24 grew 1.8% in the fourth quarter as compared with $81.77 in the fourth quarter of 2018.

Consumer Payments income from operations in the fourth quarter of 2019 was $9.9 million compared with $10.5 million in the fourth quarter of 2018. Cost of services of $62.8 million increased $5.6 million, depreciation and amortization of $8.6 million increased $2.2 million and other operating expenses of $6 million decreased $0.9 million. Higher depreciation and amortization are related to acquisitions of affiliate assets and the December 2018 acquisition of Direct Connect.

Income from operations from subscription billing e-commerce merchants declined $2.3 million year-over-year. So the Consumer Payments adjusted income from operations of $9.2 million increased $1.7 million.

Moving on to Commercial Payments, we continue to focus on growth opportunities within the Commercial Payments CPX product. As you are aware, CPX is the turnkey Commercial Payments platform that automates the AT payment process between buyers and suppliers. We remain focused on optimizing the platform as the industry further realizes the cost and efficiency benefits of electronic payments. Commercial Payments revenue in the fourth quarter of 2019 was $6.5 million, a 6% increase of $0.4 million compared with $6.9 million in the fourth quarter of 2018, which is entirely attributable to a program change within our managed services team. Encouragingly, revenue from CPX solutions increased 31.1% in the comparable 2018 period, to $1.6 million in the fourth quarter of 2019. So it's a 31.1% increase in '19 over '18.

Revenue from the curated managed services program of $4.9 million in the fourth quarter of 2019 decreased by $0.8 million compared with $5.7 million in the fourth quarter of 2018. The managed services decline was largely driven by lower incentive revenue and the retirement of a previous program. Commercial Payments income from operations in the fourth quarter of 2019 improved to $0.2 million compared with a loss from operations of $0.2 million in the fourth quarter of 2018. Cost of services of $3.2 million decreased $0.7 million and other operating expenses including depreciation and amortization decreased $0.1 million. We expect our operational changes negotiated with our managed services partners in the fourth quarter of 2019 will have a positive impact on operating margins in this segment in 2020.

Although we only formed Integrated Partners in late 2018, we continue to be excited with the traction it has gained. This segment houses our vertically specialized payment software solutions for real estate, healthcare, hospitality and the soon to be launched Consumer Finance segments. Individually these areas experienced strong growth in the fourth quarter and the full year 2019, which Tom will highlight shortly.

Speaking on an aggregated basis, integrated Partners revenue in the fourth quarter of 2019 was $4.3 million, an increase of $3.5 million compared with $0.8 million in the fourth quarter of 2018. Integrated Partners loss from operations in the fourth quarter of 2019 was $0.6 million compared with a loss from operations of $1.3 million in the fourth quarter of 2018. Cost of services of $0.7 million increased $0.4 million, depreciation and amortization of $1.3 million increased by $1.2 million and other operating expenses of $2.9 million increased $1.1 million. Depreciation and amortization is primarily related to assets acquired from YapStone in March 2019.

Other operating expenses included $1.7 million of temporary transition services from YapStone related to integration of the asset acquisition. So Integrated Partners adjusted income from operations in the fourth quarter of 2019, excluding these temporary transition services was $1.1 million.

Corporate expense in the fourth quarter of 2019 was $8.5 million compared with $6.2 million in the fourth quarter of 2018. Non-recurring operating expenses were $3.2 million in the fourth quarter of 2019 and $2.1 million in the fourth quarter of 2018. Excluding non-recurring operating expenses, Corporate expense was $5.3 million and $4.1 million in the fourth quarters of '19 and '18, respectively. Adjusted EBITDA of $16.2 million in the fourth quarter of 2019 increased $4.2 million with 34.9%, compared with $12 million in the fourth quarter of 2018.

Now moving over to the consolidated full-year results. Full year 2019 consolidated revenue increased $4 million or 1.1% -- decreased, I should say. This decrease was driven by a $16.4 million decline in Consumer Payments, a $1.1 million net decline in Commercial Payments, which were partially offset by a $13.5 million increase in Integrated Partners. Subscription billing e-commerce revenue was $7.8 million and $59.3 million in the full years 2019 and 2018 respectively. On a non-GAAP basis, excluding this revenue from the comparative years, consolidated adjusted revenue increased 15% and adjusted revenue in Consumer Payments increased by $35.1 million.

Consolidated gross profit in full year 2019 was $119.3 million, 12% increase of $12.7 million compared with full year 2018. Consolidated gross profit margin was 32.1% in full year 2019. Gross profit, as well as, income from operations associated with the subscription billing e-commerce merchants was $3.5 million in full year 2019, compared with $21.3 million in full year 2018. Despite the $12.7 million increase in gross profit, consolidated income from operations of $7.2 million in full year 2019 declined by $9.2 million. This decline was driven by a $19.4 million increase in depreciation and amortization, a $3.9 million increase in salaries and benefits, which was slightly offset by a $1.3 million decrease in SG&A. The full-year decrease in SG&A was driven by a $3.5 million decrease in certain operating expenses that we consider non-recurring in nature. These expenses were $8.9 million and $12.4 million in the full years 2019 and 2018 respectively.

So on a non-GAAP basis, excluding e-commerce profit and the non-recurring expenses from the comparative years, consolidated adjusted income from operations of $12.6 million in full year 2019 increased $5.1 million from full year 2018.

Now, once again, let's break this down within reportable segments. Consumer Payments revenue in full year 2019 was $330.6 million dollars, a 4.7% decrease of $16.4 million compared with $347 million in full year 2018. This decrease was the result of a $51.5 million decline in revenue from the subscription billing e-commerce segment. When adjusted for this influence, Consumer Payments adjusted revenue of $322.8 million increased $35.1 million or 12.2% year-over-year.

Merchant bankcard volume processed in full year 2019 of $42.3 billion grew by 11.6% as compared to $37.9 billion in full year 2018. Merchant bankcard transactions of $511.9 million in full year 2019 grew by 9.9%. Average ticket of $82.65 grew 1.5% in full year 2019, compared with $81.39 in full year 2018. Consumer Payments income from operations in full year 2019 was $32.2 million compared with $47 million in full year 2018. Cost of services of $236.4 million decreased $16.8 million, depreciation and amortization of $32.8 million increased $14.9 million and other operating expenses of $29.1 million increased $0.3 million.

Once again, higher depreciation and amortization are related to acquisitions of affiliate assets and the December 18 acquisition of Direct Connect. Income from operations from the subscription billing e-commerce merchants declined $17.8 million year-over-year. Consumer Payments adjusted income from operations of $28.7 million increased $3 million or 11.8%. Commercial Payments revenue in full year 2019 was $26 million, a 4% decrease of $1.1 million compared to $27.1 million in full year 2018, entirely attributable to a program change within our managed services team.

Revenue from the CPX solutions increased 27.8% to $5.5 million in full year 2019 compared with $4.3 million in full year 2018. Revenue from curated managed services programs of $20.5 million in full year 2019 declined by $2.3 million compared with $22.7 million in full year 2018. And once again, this decline was driven by lower incentive revenue and retirement of a previous program. Commercial Payments loss from operations in full year 2019 was $0.9 million compared with a loss from operations of $1 million in full year 2018. Cost of services of $13.8 million decreased $1.7 million and other operating expenses including depreciation and amortization increased by $0.5 million.

Integrated Partners revenue in full year 2019 was $15.3 million, an increase of $13.5 million compared with $1.8 million in full year 2018. PRET comprised $13.2 million of this segment's full year revenue in 2019. Revenue from Priority PayRight Health Services and Priority Hospitality Technology comprised the remainder of this segment's revenue. Integrated Partners income from operations in full year 2019 was $0.7 million compared with a loss from operations of $2 million in full year 2018. Cost of services of $2.3 million increased $1.8 million, depreciation and amortization of $4.4 million increased $4.3 million and other operating expenses of $7.8 million increased by $4.8 million. Depreciation and amortization is primarily related to the assets acquired from YapStone. Other operating expenses included $2.9 million of transition services from YapStone related to the integration of this asset acquisition. So Integrated Partners adjusted income from operations in full year 2019, excluding those temporary transition services was $3.6 million.

Corporate expense in full year 2019 was $24.9 million compared with $27.7 million in full year 2018. Non-recurring operating expenses were $6 million in full year 2019 and $12.4 million in full year 2018. Excluding these non-recurring operating expenses, Corporate expense was $18.9 million and $15.3 million in full years, '19 and '18, respectively. Adjusted EBITDA of $58.9 million in full year 2019 increased $9.5 million or 19.2% compared with $49.4 million in full year 2018.

Now, before turning the call back to Tom, I'll touch upon our recently amended loan agreements and overall liquidity. As fully described in Note 18 of the financial statements in our Form 10-K, we have amended the senior and subordinated credit agreements, modifying certain provisions of the agreements. But, most notably setting the maximum total leverage ratio covenant at 8:1 to December 31, 2019 and March 31, 2020 and setting it at 7.75:1 for the remainder of 2020. At year-end 2019, we had $495.5 million of outstanding debt, which includes $11.5 million outstanding under a $25 million revolving credit facility and we had $3.2 million of unrestricted cash on the balance sheet. This put the year end 2019 total net leverage ratio at approximately 6.8:1 with just over $72 million of consolidated adjusted EBITDA as determined under the definition within the loan agreements.

Now, our cost structure is an added benefit, nearly three quarters of our cash cost structure is directly variable with revenue. Approximately 15% is semi-fixed consisting of salaries and SG&A and just 10% of our cash costs are fixed. And those are predominantly interest and principal repayments. This provides us with confidence in being able to navigate through the uncertain economic landscape resulting from the COVID-19 pandemic. So now I'd like to turn the call back over to Tom.

Thomas C. Priore -- Chief Executive Officer

Thanks, Mike. Given that we are all operating in the middle of a global pandemic, I wanted to take some time to provide an update on the trends we're seeing in the current quarter and near-term expectations for our business. Continuing the positive momentum from late last year, January and February processing volumes were the strongest in our history. Each month topped $4 billion representing a 14.7% increase from the equivalent period in 2019. More importantly, despite the significant impact of COVID-19, in March, we are on track to process roughly $3.7 billion in volume which represents a manageable 7% decline from March 2019 and the run rate from January and February 2020. These March figures don't account for a significant increase in rent payment volumes we've seen recently that is presently running through the YapStone partnership.

Importantly, as of this morning, we have over 4,720 approved newly boarded merchants in March, largely in line with our historic trends of 4500 to 5,000 per month. This consistency reflects the strength of our diverse reselling channels and value of our integrated product offerings, namely e-tab, our order ahead platform for hospitality venues, Priority PayRight digital healthcare payments offering, rentpayments.com and Landlord Station serving property managers and our MX B2B and CPX automated payable solutions, which I'll speak to in more detail shortly.

There are a handful of important reasons we've been able to sustain our momentum through March. As you may recall, Priority's infrastructure is fully virtualized on our vortex cloud and has been previously put to the test under remote operating circumstances. It allows each of our employees to work remotely as if they were at their desks. As a result, we were immediately able to pivot in response to shelter-in-place orders nationwide to service both merchant and reselling channels' needs for our solutions. Furthermore, our shared services operating model enabled us to position client service implementation, risk and underwriting personnel to their greatest utility to advance the goals of our partners. As the pandemic spread by mid-March, we moved quickly to deliver solutions to merchants that needed digital storefront and payment platforms to sustain their business. Practically speaking, there is no one available to process checks or collections at rental properties, landscaping construction and other field services businesses. Hospitality venues are only able to fill orders to go that can quickly overwhelm staff with phone orders. In these circumstances, we were able to step in and fill the void by providing easy-to-implement solutions, providing a safe and scalable transaction environment that is low friction for both buyer and seller.

Before sharing Q1 and March performance statistics through the 30th for the aforementioned integrated segments, it's worth noting that the conditions influencing behavior in the current environment quite likely portend a wholesale change and how businesses operate in the future. Increased use of technology to support curbside pickup or hospitality venues and integrated software with digital collection tools to support healthcare revenue cycle, rent collections and accounts payable for businesses of all sizes is likely to flourish, if only for having the option to use it, should uncertain circumstances like today's rise again. While the pandemic has been a catalyst to accelerate its evolution, it will be hard for us to imagine a world that reverts to a pre-COVID environment for SMB payment solutions.

Now with regards to specific performance metrics, Priority's rent payments business has seen 16 new property management companies enroll, representing over 30,000 new units to our platform through March. Meanwhile, over 35 existing property managers representing approximately 150,000 additional units have been extending digital rent payments further into their rental networks. For context, at an average rent of a $1,000 per month, each 25,000 units represents $300 million in annualized processing volumes. We're optimistic that this trend can grow further as we continue to pursue enterprise clients and our reseller community extends Landlord Station to middle market and smaller landlords.

Our Hospitality Technology suite is seeing similar growth as order ahead and curbside pickup becomes part of normal course operations. Q4 2019 had already seen a 252% increase in boarding activity and a 55% increase in processing volumes versus the prior year period. Q1 2020 experienced more acceleration in adoption as the rate of new merchant boarding improved by 137% and volume grew by an additional 33% versus Q4 2019. This has been particularly pronounced in March, where volume thus far has increased 71% from February levels. We believe this trend can continue as new venues that were added in the last week to 10 days continue to increase sales volumes and a healthy pipeline of businesses and implementation and contracting go live.

Interestingly e-tab's order ahead technology is also being used to meet customer needs for curbside pickup by businesses outside the hospitality sector, like liquor stores and convenient stores as a couple of examples. Similarly on the healthcare front, we're working with many doctors' offices that are inundated with patients and looking for ways to serve them in unique ways while mitigating disruption in the operation of their practice. Priority PayRight has been meeting this need, further building on its growth over the past several quarters. Consistent with our other integrated verticals, PayRight processing volumes increased 168% for the full year 2019 versus 2018 with Q4 2019, posting a 134% increase versus the comparable 2018 period. This growth trend has remained in place with estimated Q1 2020 volumes improving by 31% versus Q4 2019 levels and over 150% over those processed in Q1 2019.

Last, reviewing the performance of our B2B payment assets, MX B2B and CPX, we've seen a resounding amount of stickiness in these portfolio segments. Our most recent available processing data as of the 29th reflected gross volume in March, largely in line with February and January averages in most of our B2B segments. Construction, agriculture, manufacturing and legal services are all seeing volumes between 1% and 5% variances from recent trends. Similarly, CPX's March issuing -- card-issuing payments volume is within 3% of February and 6% of January levels with a few processing days remaining to report in March. Processing volume for all types of CPX payments is showing a modest 4% decline in March versus January and February averages. It still represents an increase of over 200% from the same period in 2019. We believe the slight decline is reflective of businesses still transitioning to remote working environments rather than any change in behavior.

Simply stated, March processing volumes and sales successes are certainly encouraging, particularly when viewed through the lens of the present economic environment. It is our belief that they represent the resilience of our operations, value of our MX platform and product offering and importantly, the unique construct of our distribution partnerships that efficiently monetize merchant networks. As an advocate of the independent resellers and vertically focused ISVs and business network throughout the U.S., we've largely been juxtaposed to the market consensus.

Going forward, we expect that variable cost structure of our distribution channels and its geographic and industry diversification will continue to be a differentiator, positioning us as a leading consolidation platform in the evolving payments landscape in the years ahead. While coming into 2020, we were extremely excited about the prospects for Priority to continue to build on the momentum noted in Q4 2019. January and February processing volumes that I discussed earlier, further reinforced our enthusiasms. Recent increases in rent payment boarding and the improvement of our SaaS and subscription products, boarding trends and processing volume are favorable leading indicators.

Nevertheless, as April begins, the level of economic uncertainty is only becoming more pronounced and impossible to predict. We are of the view, as are many others, that April will be the tale of the tape, so to speak. While being proactive, where we can, there is still potential for many less predictable considerations that can influence our business. We are cautiously optimistic that our SaaS and subscription revenue opportunities can offset larger processing volume declines anticipated in April, and potentially the months ahead. But it's premature to be confident in that outcome.

Consequently, we believe it would be imprudent to provide full-year 2020 guidance until we are able to more accurately forecast the financial impact of COVID-19 in the weeks to follow. It is our desired goal to be in position to provide our full-year 2020 forecast at the time of our Q1 2020 earnings release in May. However, depending on the lasting impact of the COVID-19 crisis, we may need until the second quarter release.

In conclusion, we're very pleased with our fourth quarter and full year results, particularly considering the impacts of the pause of our subscription e-commerce business and we are proud of our team and how they moved so quickly to respond in the face of a global pandemic. We are further encouraged by the leading indicators of Q1 2020 and, needless to say, we're intently focused on remaining vigilant about our operating expenses and agile to capture growth opportunities as the impact of COVID-19 on the U.S. economy becomes more pronounced broadly and the payment segments, in particular, begins to crystallize.

I've always taken to heart the notion that the decisions of our past are the architects of our present. While the COVID-19 pandemic is an unpredictable event, we are seeing evidence that our past decisions to build defensively positioned counter-cyclical integrated payment assets in segments like rents, hospitality, healthcare and B2B has positioned us favorably to weather this crisis and future economic cycles. While these past strategic initiatives provide a measure of cautious optimism, ultimately, our performance may well be a matter of sheer will and the strength of the Priority community of partners. I was reminded of this by an email I received from a member of our client service team, Kenny Inzart [Phonetic] in response to a message I had sent to our employees. His very straightforward message encompassed our attitude at Priority. It said, united we stand, together we rise. COVID-19 is dealing us and our community a blow, but together, our Priority team, as well as our community of technology reselling and merchant partners will rise. Operator, we would now like to open the lines for questions, please.

Questions and Answers:

Operator

Certainly. [Operator Instructions] And our first question comes from the line of George Mihalos with Cowen.

George Mihalos -- Cowen -- Analyst

Hey, guys. A couple of questions. So, just firstly, I want to make sure I heard correctly as it relates to the subscription and e-commerce, the momentum you're seeing there. Is the expectation that in the first quarter of '20 that you're going to see a year-over-year increase in that revenue stream?

Thomas C. Priore -- Chief Executive Officer

To be precise, George, are you referring to subscription e-commerce or...

George Mihalos -- Cowen -- Analyst

Yes subscription e-commerce, I apologize.

Thomas C. Priore -- Chief Executive Officer

Yeah, yeah. Yes, we will.

George Mihalos -- Cowen -- Analyst

Okay. And I just wanted to ask the trends that you're seeing throughout March, again, I think the feedback that we've gotten through most processors up until the middle of the month, it was sort of business as usual and then obviously a very precipitous declines over the last kind of two weeks or so. I'm just curious if there's anything you can share in terms of the magnitude of those declines, maybe on a week-over-week basis as you've gone through March.

Thomas C. Priore -- Chief Executive Officer

Sure. Yeah, and that's largely accurate. Through the middle of the month, we were in line, if not probably slightly ahead of January and February levels. We've seen in the back half of the month, 18% was our kind of week-over-week decline. So I think by industry standards, that's probably at the lower end in terms of what I've certainly heard out there. And now we're assessing the SaaS revenue elements that we have through our integrated channels, as well as other subscription fee-based revenue sources to see how that will all net out.

The other thing I would just note to you, George, is that while the aggregate is 18%, the larger declines, as you might imagine, are in the hospitality segment for on-premise processing and that was closer to 50%. So our other segments are off substantially less. Hospitality also tends to be, it just is our lowest margin segment. So, and as I noted, we've got a measure of cautious optimism now. As that evolves into April, we are of the view that those declines that I just noted, sort of that 18% range, will be larger in April. Because more of the [Speech Overlap] is being affected.

George Mihalos -- Cowen -- Analyst

That makes sense. And then just a question in terms of -- can you speak a little bit to the extent that you are proactively taking out cost from the sort of the fixed cost base, given the environment that we're in right now?

Thomas C. Priore -- Chief Executive Officer

Well...

Michael Vollkommer -- Principal Financial and Accounting Officer

Go ahead, go ahead, Tom.

Thomas C. Priore -- Chief Executive Officer

No, please, Mike. I'm happy to follow you up.

Michael Vollkommer -- Principal Financial and Accounting Officer

No, I was just going to say, George, the truly fixed is really small, I've noted sort of 10%. The lion's share of 75% of cost is directly variable with revenue and then the rest is what I call semi-fixed and this is probably what you're talking about which is SG&A, and salaries and other costs. And we are -- and as Tom had mentioned in his comments, we're laser focused on doing what we need to do in the areas where we can in that semi-fixed area where we can take some actions to maintain profitability and liquidity.

Thomas C. Priore -- Chief Executive Officer

And, George, look, I'm going to -- this is a very unique time and we, fortunately, at Priority run a pretty lean shop. Take note that our managed services businesses, right, all those employee costs are covered by our vendors. That's part of our contract. So that's one of the reasons why our costs are largely variable. But we are waiting for some additional news to come out of the government in terms of how the -- how lending programs and other government sponsored programs are going to be conveyed to businesses like ours, so that we can optimize, not just, I'll say, overreact from the standpoint of our employees to this environment, but we have some time, and we feel very comfortable to optimize that outcome.

Look, it would be imprudent to suggest that we are not all reconciling our expense structure. We are, but we are doing that with recognition that this is going to affect a lot of peoples lives in dramatic ways and being sensitive to that. As I said, while optimizing our opportunities for the future, which we are of the view that they are significant given the payments assets -- payment operating assets that we maintain. So as we roll out of this, we certainly want to make certain that we are positioned for to capture the opportunities that we think will be substantial.

George Mihalos -- Cowen -- Analyst

Okay and just last question for me, just, you talked about the managed services business, can you talk a little bit about how that did performing sort of the end of March and how you're thinking about that going in April. I mean, obviously, there are a lot of moving parts, got government stimulus packages and the like that are going to be proliferating through to the SMB marketplace. How are you thinking about that business now going forward? I would assume it will -- it should have a pullback over the near term.

Thomas C. Priore -- Chief Executive Officer

Well, before I answer your question, George, if I may ask, why do you note that it would have a pullback? I'm just curious what you are reacting to so that I can give you a more precise answer.

George Mihalos -- Cowen -- Analyst

Just sort of SMBs that are potentially temporarily closed down, a higher churn rate, and also this notion of will there be loans coming now from the government that they can tap into as opposed to potentially some of their more traditional partners.

Thomas C. Priore -- Chief Executive Officer

I see, I see. All right. So, well, let me address a couple of things, because there is I think some important elements that you kind of noted. First off, we've been assembling a substantial amount of information to convey to our agents and our merchants in terms of the programs that they can adapt and be a part of, to help them navigate this. And I'm pleased to say that our team has been just very responsive. And I think, been out in front of getting merchants and our small businesses that are resellers, right, information that's going to help them to navigate. And so that's kind of been one aspect that I think will give us stability.

As it relates specifically to the managed services segment, the lion's share of the all of the incentives, actually, I shouldn't say the lion's share, It's actually all of the incentives. So the way the programs work, our incentive opportunities go toward the sales employees. So that's not part of Priority's net revenue, if you will. We have been able to negotiate an improvement in our platform costs with our vendors. So we actually expect that there'll be an improvement in the net margin and net income of that business segment through 2020 due to the contract changes we made in Q4, 2019.

George Mihalos -- Cowen -- Analyst

Okay, thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Claire Galbo [Phonetic] with LCA.

Claire Galbo -- LCA -- Analyst

Does the COVID situation create opportunities for you on the commercial side of the business?

Thomas C. Priore -- Chief Executive Officer

Thank you. Great question. We think it does quite meaningfully. If you look at the statistics and this is also -- I think I'll explain a little bit of background, why we've done what we've done. Within the B2B segment, most of our peer group is focused on T&E and travel and they're suffering as a result of that. We took a longer-term view of the opportunity pretty early on. If you look at Visa and Mastercard data, they will reflect to you the $120 trillion opportunity in Commercial Payments or B2B payments. $90 trillion of it is in automated payables and we've built into the automated payables opportunity.

We anticipate that given the conditions that exists now and we've always claimed that this is a counter-cyclical opportunity, we are saving money or creating revenue opportunities through payables is going to be critical. Somebody is going to adopt these. We are seeing that uplift, not just from organizations, individual companies, but also the commercial banks and their treasury units. So we're pretty excited about the prospects of that only gaining further momentum and feel like we're well-positioned for it in the months ahead.

Claire Galbo -- LCA -- Analyst

Thank you. And just one other question, how active do you expect to be on the acquisition front this year, especially given the COVID situation?

Thomas C. Priore -- Chief Executive Officer

Well, I would kind of answer it this way. In our view, every acquisition is situational. We do think that there is going to be opportunities given the fallout of COVID for further consolidation, probably faster consolidation and downstream acquiring. So we'll be looking for those opportunities. I would say the same is going to be true of the Integrated Partner verticals that we're already in. You know it's, I think, going to be a rationalization on the part of smaller operators there that -- their safety and scale and look to become part of larger operators that are well capitalized, or have technology that would eliminate their need for investments in infrastructure, cloud-based technologies, etc, -- cloud-based infrastructure.

I also think that there is a number of PE firms that are also probably reconciling some of the investments they have and ways to perhaps position those businesses better for the future again through business combination. So we anticipate that we'll be active in evaluating opportunities and we think that those that we'll pursue will be -- will certainly have an equity component to them so that we're able to create strong alignment with whatever organization that do come our way for acquisition for the long term.

Claire Galbo -- LCA -- Analyst

Thank you for the explanation. And just one last question, can you talk a little bit about the soon to be launched Consumer Finance segment, you mentioned in the Integrated Partners discussion?

Thomas C. Priore -- Chief Executive Officer

Sure. So we have a partnership that we've created with a company called Payix. There was actually a recent press announcement out about it. But they are a smaller technology company that we're very excited about, the way they've approached the market and we are highly confident that we can be a driver of their growth. We do have an equity interest in the business. And the way that particular technology works is it integrates with loan servicing platforms of all types, auto, can do real estate and others. And it allows for the collection of payments through largely debit. But the reason we liked the technology as much as we do is, it enables the chat function between this very smooth -- between the servicer or lender and the consumer. Typically when things are under collection, consumers ignore calls, but they're willing to chat. So it keeps them engaged.

The other thing we liked about it from a compliance standpoint, because it's logging the back and forth, it really -- it works well with CFPB and FTC considerations around how consumers are treated so we can look for instances where maybe the lenders are not acting appropriately and we can cancel them and see that they make changes. But in instances where there may be a consumer complaint, have backed up for those lenders to demonstrate that they have done things in a proper way. So it really protects that marketplace, we think, in a really low friction and smooth way, in addition to creating a low friction framework for consumer collections, which is where the world is navigating.

Claire Galbo -- LCA -- Analyst

Thank you.

Operator

Thank you. And I'm showing no further questions. So with that, I will turn the call back over to Tom Priore for closing remarks.

Thomas C. Priore -- Chief Executive Officer

Well, I'd like to thank everyone for their attendance, particularly given the extreme times that we're all living in. Hope everyone stays safe and healthy, and the best from our family at Priority to all of yours. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Chris Kettmann -- Investor Relations

Thomas C. Priore -- Chief Executive Officer

Michael Vollkommer -- Principal Financial and Accounting Officer

George Mihalos -- Cowen -- Analyst

Claire Galbo -- LCA -- Analyst

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