Usio, Inc.

Good morning everyone and welcome to the UCO earnings conference call for the second quarter ended June 30th, 2022. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one using a telephone keypad. To withdraw your questions, you may press star and two. Participants of this call are advised that the audio of this conference call is being broadcast live over the Internet and is being recorded for playback purposes. A replay will be available shortly after the end of the call through August 18, 2022. At this time, I'd like to turn the floor over to Joe Hassett, Investor Relations. Sir, please go ahead.

Thank you, Jamie, and thank you, everyone, for participating today. Welcome to UCO's second quarter fiscal 2022 financial results conference call. The earnings release, which UCO issued yesterday after market closed, is available on the company's investor relations website at uco.com, investors on the news. If you can't find it there, please contact me and I'll be able to access it for you. On this call today are Louis Hoke, President and CEO, Tom Jewell, Senior Vice President and Chief Financial Officer, Greg Carter, Executive Vice President of Payment Acceptance, and Houston Frost, Senior Vice President of Free Pay Services. Management will provide prepared remarks, and then we will open the call to your questions. Before we begin, please remember that comments on today's call include forward-looking statements. Forward-looking statements can be identified by the use of such words as estimate, anticipate, expect, believe, intend, may, will, should, seek, approximate, or plan, or the negative of these words and other similar words and phrases. Forward-looking statements by their nature involve estimates, projections, goals, forecasts, and assumptions, and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements, including risks related to the COVID-19 pandemic and its effect on the economy, the realization and the opportunities from the IMS acquisition, management of the company's growth, the loss of key resellers, The relationships with the automated clearinghouse network, bank sponsors, third-party card processing providers and merchants, the volatility of stock price, the loss of key personnel, growing competition in the electronic commerce market, the security of the company's software, hardware, and information, compliance with complex federal, state, and local laws and regulations, and other risks detailed in the company's filings with the SEC. These forward-looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events. UCO expressly disclaims any obligations or undertaking to update or revise any forward-looking statements made today to reflect any change in UCO's expectations with regard thereto or any other changes in the events, conditions, or circumstances on which any such statement is based, except as required by law. Please refer to the company's SEC filings on its investor relations website for additional information. And with that, I would now like to turn the call over to Lewis. Lewis?

Thank you, Joe, and welcome, everyone. I'm pleased to report another great quarter for UCO, our eighth consecutive quarter of year-over-year revenue growth and our highest card processing quarter in the history of the company. It was also another quarter in which we undertook decisive actions to build value for our shareholders. In May, we announced the share report repurchase agreement. And in the second quarter, we repurchased nearly a half a million dollars of our stock in the open market. We also strengthened and expanded our board with the addition of an accomplished financial professional, Michelle Miller. All of our business lines over the first half of 2022. And with a strong pipeline of new business opportunities and the potential of substantial spoilage from prepaid cards beginning in the third quarter, and with the flexibility afforded by our strong unlevered balance sheet, we're optimistic that this will be another record revenue year for UCF. Considering the ongoing uncertainty of the Voyager Digital exiting from bankruptcy quickly, and continuing as a customer of UCO, we were revising our expectations for the full year 2022 revenue growth to 12% to 18%, conditioned on the continued enthusiasm in the FinTech lending industry and favorable economic conditions. For the quarter, revenues were $16.2 million, a 6% increase from a year ago, while adjusted EBITDA was a $600,000 loss. Revenues in card processing, prepaid card issuing, output solutions were all up for the quarter and year over year. While ACH was up for the first six months of the year, it was down from a year ago quarter when cryptocurrency market was at its peak. In the first quarter, we called out our expectations for ACH for this quarter. Crypto also distorted our year-over-year total dollars process comparisons in the quarter, but on a sequential basis, total dollars process $2.4 billion in the second quarter was up sequentially from the first quarter. This quarter was a clear illustration of the value of our strategy of being a diverse fintech payments processor, delivering our services to a variety of end markets with a mixture of electronic payment channels. Despite challenges in cryptocurrency that affected one of our most valuable customer relationships, we were able to grow revenues. Now let me offer some high-level comments by business lines. ACH and complimentary services was $3.9 million in revenue, down slightly from a year ago when we realized record ACH volumes and transactions as the cryptocurrency market boomed. Electronic transactions and dollars process and return check transactions process were all up sequentially from the first quarter. There were no expectations, there are no expectations of any material contribution from the cryptocurrency market for the balance of the year. But we are seeing increased activity from our lending accounts and other verticals as the economy cools and inflation rises. As previously stated, our cryptocurrency customer that accounted for approximately 8% of our revenue, most of which was ACH. The ACH business has been through challenges before, so the next quarter or two, we believe ACH transactions will be down 25 to 30% as compared to the same period a year ago. Over the long term, we believe our value propositions, not just certification, synergies with our other electronic payment products and more aggressive marketing will grow the business. We also expect return transactions to be up as much as 50% in the third and fourth quarters of 2022 as compared to the same periods in 2021. As always, ACH continues to board new customers and just recently, We are named to be among the first of just a handful of technology firms to be chosen to participate in the MasterCard Engaged Partner Network. This program, sponsored by MasterCard, is designed to help businesses and fintechs quickly deploy open banking solutions for payments and lending decisions at scale. This is quite an honor. one that we think that can lead to many exciting new opportunities and should lead to growth in our ACH revenues as we are the only provider that's selected that is not just certified. CARD had a record second quarter, total dollars process exceeding $332 million with 2.8 million transactions process. PayFact remains CARD's growth engine. And PayFact revenue was up again strongly in the second quarter, even more impressive when considering growth was over the highest revenue base of any of our business lines. With over $650 million in volume already processed this year and several exciting large opportunities on the doorstep, CARD is on pace for another record year. On a percentage basis, prepaid was our fastest growing business line, both for the quarter and for the first half of 2022, with revenues up 29% in the quarter and 112% year to date. Transactions process in the quarter nearly tripled from a year ago, while load volumes and purchase dollars both increased by more than 75%. Prepaid continues to have a very active pipeline of new opportunities. From a financial perspective, many of the original COVID relief and older card programs are ending. Beginning in the third quarter and continuing somewhat steady from that point forward, we expect this to lead to a stable stream of expiring cards. Upon expiration, we will be able to realize any breakage or spoilage from unused funds remaining on these cards, which could potentially account for millions in revenue. Houston Frost will talk more about this and other new prepaid card programs in just a minute. Finally, Output Solutions had a strong quarter with revenues up 12% as they processed 2.1 million transactions or pieces. Although down somewhat sequentially for the first quarter, much of the second quarter consisted of more reoccurring or repeating business a much more valuable revenue stream than some of the one-time programs such as tax notices or voter registration cards recognized in the first quarter. Again, the addition of dedicated sales organization and the synergies with our other businesses has been a real benefit to Output Solutions. We expect to see Output Solutions continue to make a valuable contribution to our revenue growth and profits. and it is outperforming management's expectations. Let me take a minute to talk about margin and expenses. Margins will continue to reflect the relative contribution of our various business lines in the quarter, as each have a different margin profile. In the second quarter, margins were impacted by the slowdown of ACH, our highest margin business. and a larger contribution from our other business lines, for instance, Output Solutions, which has a lower margin profile. Going forward, we're working on efficiency and productivity improvements that we believe will raise margin in each of our businesses and UCO as a whole. Expenses reflect spending that was needed to catch up with our growth, as well as maintain our growth momentum. Again, we're looking closely at our cost structure. For instance, some of the investments we made in anticipation of adding a large card program in the second half of the year. While some of those costs were contingent, such as some call center outsourcing, we're already unwinding some unnecessary spending. UCL is dedicated to optimizing the leverage in our business so we can continue to contribute more to the bottom line from our strong top line growth. This was another growth quarter for UCO. We demonstrated the resilience of our diversification strategy, serving a variety of end markets with a mixture of electronic payments and related solutions. We expect the second half of the year to be exciting time at UCO. as we continue to introduce innovative new products into large and rapidly growing markets. Our balance sheet is strong and we are committed to creating shareholder value, not only through continued strong growth, but also through shareholder friendly actions such as our shareholder repurchase program. Tom will talk more about the remainder of the year, but we expect to be back to adjusted positive EBITDA in the fourth quarter due to increased revenue and lower SG&A. On a final note, our sales pipeline is stronger than ever. One of our large ISVs that services governmental entities for tax fees and fine payments has alerted us that they will be boarding Los Angeles County on our platform in September for payment processing and print and mail for the county's fees, fines, and notices, and their associated payments. L.A. County is the home for over 10 million residents. With that, I'd like to conclude my opening remarks and turn the call over to Houston Frost, our Senior Vice President of Prepaid Services.