Usio, Inc. (NASDAQ:USIO) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Good afternoon, everyone, and welcome to the Usio Earnings Conference Call for the First Quarter of Fiscal 2023. All participants will be in a listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. All participants on this call are advised that the audio of the conference call is being broadcast live over the internet and is also being recorded for playback purposes. A replay will be available shortly after the end of the call through May 17, 2023. I would now like to turn the conference over to Paul Manley, Senior Vice President of Investor Relations. Please go ahead, sir.

Paul Manley: Thank you, and thank you everyone for joining our call today. Welcome to Usio’s first quarter fiscal 2023 conference call. The earnings release, which we issued today after the market closed, is available on our website at usio.com under the Investor Relations tab. On this call today are Louis Hoch, our Chairman and CEO; Tom Jewell, Senior Vice President and Chief Financial Officer; Greg Carter, Executive Vice President of Payment and Acceptance; and Houston Frost, Senior Vice President of Prepaid Services. Let me remind our listeners that certain statements made during the call today constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities and Litigation Act of 1995 as amended.

Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties are described in our earnings press release and in our filings with the SEC. The forward-looking statements today are made on the date of this call, and we do not undertake any obligation to update these forward-looking statements. Management will provide prepared remarks, then we’ll have a question-and-answer session. But let me lead off with the highlights from this afternoon’s release. I am pleased to report another quarter of record results, with first-quarter revenue up 18% and our 11th consecutive quarter of revenue growth, and beating analyst estimates.

We also reported a quarter of positive adjusted EBITDA, which improved by nearly $1.4 million from the same quarter of 2022. Adjusted EBITDA is a non-GAAP financial measure, and our earnings release includes a reconciliation of adjusted EBITDA to GAAP-operating income. We continue to be in excellent financial condition to support our growth objectives for the year. Last quarter, we told you that we were entering fiscal 2023 with strong momentum. Thanks to a strong 2022 with revenue growth that has already accelerated compared to that last year. And with many new exciting pipeline opportunities, we have established a firm foundation to meet our 2023 financial guidance. Now, I will turn the call over to Louis.

Louis Hoch: Thank you, Paul and welcome everyone. As Paul noted, I’m pleased to report another record quarter driven by continued card and output solutions growth. Also contributing to our strong quarter was record prepaid performance from the strength of residual revenues from expiring card programs. This spoilage will continue throughout 2023 and into 2024. Once again, our results demonstrated the benefits of our diversified business strategy; diversified in the markets that we serve, and the payment channels that we offer. Two programs I’d like to highlight that have us excited are MoviePass and LA County. Both have the potential to be transformative. Due to LA County being extremely pleased with our performance to date, they are expanding their engagement with us.

Our success has also drawn the attention of other large counties across the country with similar programs. MoviePass is continuing to see positive momentum as well as is scheduled to launch their service nationwide in the summer. While both programs contributed to our first quarter performance with LA County’s revenues benefiting multiple UCO business units, we expect them to be a part of our future growth story, with reports of MoviePass’ recent partnership with Walmart being a pleasant surprise. As you can see from our ACH results, we’re comparing against strong volume from Voyager in the first half of last year. However, our relationship with Voyager is essentially being completely wound down to their bankruptcy. Adjusting for Voyager, ACH would have shown year-over-year growth in the first quarter, and we expect outright ACH growth in the second half of the year.

Our output solutions business grew 26% in the quarter and $1 million sequentially, and it was all organic. We believe that output solutions can continue to deliver strong growth by focusing on programs that offer attractive, reoccurring revenue characteristics like printing and distributing statements, as well as selling more integrated disbursement solutions through check printing that is required for our consumer choice disbursement platform. In particular, I think there is a tremendous opportunity in expanding our electronic bill presentment and payment capabilities, and we are working on strategies to more aggressively pursue these opportunities. Now that our prepaid incentive programs sold in previous years are coming to expiration, we’re now earning enhanced breakage and spoilage.

This has been beneficial to our overall effort to improve profitability. In the first quarter, margins were up over 300 basis points, while SG&A was up less than $100,000 compared to the first quarter a year ago. This enabled us to sustain positive adjusted EBITDA, generate strong cash flow and reach positive GAAP earnings per share. Since we primarily serve recession-resistant markets, we’re not overly concerned about any economic slowdown. In fact, if the economy slows, many of our businesses could generate even better growth. Our pipeline across all segments continues to be the strongest in the company’s history. We have large opportunities in prepaid, LA County type opportunities with other municipalities and output solutions, and new payback deals, such as recently announced integration with Microsoft’s Business Central platform, which have great revenue potential.

This is one of the best quarters in Usio’s history, not only from record financial performance, but also because of the success of penetrating new markets and building new relationships across all of our businesses. This is going to be an extremely exciting year, in which we believe we will achieve our top-line guidance and expand our foundation in these rapidly growing markets for even greater success in the future. And now I’d like to turn the call over to Houston Frost.

Houston Frost: Thank you, Louis, and thank you to everyone participating in the call this afternoon. The first quarter, card-issuing revenues were up 74%, primarily attributable to the breakage revenue earned on the New York City COVID incentive program. In the year ago quarter, we were in the heart of this program, which is why our year-over-year volume, transaction and purchase activity was down. Importantly, on a sequential basis compared to the fourth quarter, both load and purchase volume were up as we continued to build our underlying business. The card-issuing business continues to grow and solidify its relationships. We are keeping up with our clients launching general funds disbursement programs, guaranteed income programs and corporate expense programs.

The implementation team has been particularly busy with clients employing our remote authorization service. This service powers deeply integrated Fintech, enabling card programs like MoviePass. Speaking of MoviePass, their beta customer transactions have been ramping up, and we are expecting their public launch this summer. In true Hollywood style, the paparazzi published an unofficial piece discussing a potential Walmart MoviePass partnership. To reiterate Louis’s comments earlier, demand for solutions that offer recipients additional choice in how they receive their funds continues to increase. Our team is refining the service, which currently offers physical and virtual debit cards, ACH, Push to Debit, and checks. It is a flexible and powerful solution that leverages UCO’s diverse payment services.

With that, I’d like to turn the call over to Greg Carter.

Greg Carter : Thank you, Houston, and good afternoon everyone. It was another record quarter in par, with revenues up 8% on a similar 8% increase in dollars processed and a 24% increase in transactions. Results were once again led by the strength of our flagship PayFac business, where revenues advanced 27% on a 30% increase in volume and a 31.4% increase in transactions processed, all were record performances. So we had a really good first quarter with good trajectory into the second quarter. It’s just a continuation of what we’ve talked about before. Our efforts and model deliver the steady growth we have been discussing. In the call just a few short weeks ago, we mentioned that we had both a strong January and February driven by ISV growth, as well as the addition of new ISVs that began processing immediately.

Subsequently, it was also a record March. We also had 38 ISVs in implementation at the beginning of the year, and we are focused on industries such as healthcare, legal, and certain field service applications, which are generally recession-resistant and as the results demonstrate have strategically paid off. I’m very excited about the relationship we just announced with Suite Engine, an important element of the Microsoft Dynamics environment, essentially Microsoft’s CRM solution. This program provides large, sophisticated enterprise customers the ability to facilitate payments without having to leverage a third-party payments application outside the MS Dynamics environment. We were introduced to Suite Engine by one of our customers at a trade show last year who was using technology from both companies.

And Suite Engine said, ‘If we can do the same for them, then they want to be a Usio-ISV partner.’ So even though they are considerably larger than our average ISV serving Fortune 500 clients, they selected Usio for the same reasons as everyone else, our technology, our customer service, and our ability to turn the electronics payments traversing their system into a revenue stream. Clearly, participation in trade shows is paying dividends, and my team and I continue to have a significant presence at these events. We continue to invest to broaden and strengthen our offering. For instance, we will be adding another physical terminal provider, as well as another back-end processing partner to serve a more diverse set of merchant category codes.

All-in-all, it’s been a strong start to the New Year. We are looking forward to the addition of Suite Engine and the imminent completion of our other in-process implementations. With that, I’d like to conclude my remarks and turn the call over to Tom Jewell, our Senior Vice President and Chief Financial Officer, to discuss our financial results.

Tom Jewell: Thanks, Greg and welcome everyone. Thanks again for joining our call today and for your interest in Usio. In summary, revenues were up 18% driven by strong growth in prepaid and output solutions. Credit card revenues were up, and ACH and complementary services were down, primarily as a result of the Voyager bankruptcy. Gross profits were a quarterly record for the second consecutive quarter, and margins expanded 370 basis points from a year ago. The gross margin improvement reflects a higher contribution from breakage and spoilage, as well as strong margins from output solutions. Selling, general and administrative costs were up 2% from the year-ago period. For the second consecutive quarter, we generated over $1 million in non-GAAP adjusted EBITDA.

Non-GAAP adjusted operating cash flows as reflected in our earnings release and 10-Q was $1.3 million for the quarter, up from $0.5 million in the same year-ago period. Our cash increased by $1.1 million in the quarter reaching $6.7 million as of March 31, 2023. With that, I will turn the call back to the operator to conduct our question-and-answer session.

Q&A Session

Operator: [Operator Instructions]. And our first question comes from Jon Hickman of Ladenburg. Please go ahead.

Operator: The next question comes from Gary Prestopino of Barrington Research. Please go ahead.

A – Louis Hoch: That Q1 number of last year was obviously inflated by Crypto’s processing. Crypto payments average ticket is $500. So they were a big part of those dollars. But you got to be careful when you’re looking at dollars, because our metrics, financial metrics can still do well if dollars go down, but transactions go up and that’s what we saw last year. Overall dollars for the year were down, but transactions were up, and of course we did really well growing the company.

Operator: [Operator Instructions]. That will conclude our question-and-answer session. The conference has now also concluded. Thank you for attending today’s presentation and you may now disconnect.