Usio, Inc.

Good afternoon, everyone, and welcome to the UCO Earnings Conference Call for the second quarter of fiscal 2023. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. 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 call through August 28th, 2023. I would now like to turn the conference over to Paul Manley, Senior Vice President, Investor Relations. Please go ahead.

Thank you, and thank you everyone for joining our call today. Welcome to UCO's second quarter fiscal 2023 conference call. The earnings release, which we issued today after the market closed, is available on our website at uco.com under the investor relations tab. On this call today are Louis Hoke, our chairman 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 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 maturely 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 made today are as of the date of this call, and we do not undertake any obligation to update these forward-looking statements. During today's call, we will refer to non-GAAP financial measures such as adjusted EBITDA. Our earnings release includes a reconciliation of adjusted EBITDA to GAAP operating income. Management will provide prepared remarks, then we'll have a question-and-answer session. But let me start with some highlights from this afternoon's release. I am pleased to report another quarter of record results with second quarter revenue up 31%, accelerating significantly from the 18% growth rate reported in the first quarter and our 12th consecutive quarter of revenue growth. And for the third consecutive quarter, we reported over 1 million of positive adjusted EBITDA, which was once again up dramatically from the year-ago quarter. These results solidly exceeded expectations from the analysts and have us well on our way to meeting our fiscal 2023 financial guidance. In addition, we continue to be in excellent financial condition with cash up again this quarter, which we believe is more than sufficient to support our growth objectives for the year. So another record quarter along with strong bottom line results and positive cash flow. What you will further hear on this call from our team are the many opportunities in our pipeline that illustrate how our strategy is working and why we are extremely excited about the future here at UCO. Lastly, I'd like to announce that UCO has initiated a comprehensive ESG process with the goal to issue our inaugural ESG report sometime early next year, reporting on the progress that we will be making in this important area. Now, I will turn the call over to Louis.

Thank you, Paul, and welcome, everyone. I want to begin by reiterating Paul's key points, that not only was this a record quarter in terms of current financial performance, but it was also another quarter of significant progress in expanding our franchise and planting the seeds for even a better future performance. For those reasons, we today are reiterating guidance for revenue growth in the 18 to 20% range this year. Results, once again, reflect our diversified business strategy. diversified in the markets we serve and the payment channels that we offer. This quarter, results were led by performance at prepaid, where revenues were up 276% and output solutions, which had another 20% growth quarter. Prepaid continues to benefit from growth of the underlying business aided by a growing stream of residual revenues from expiring card programs. As Houston will discuss, we are bringing on numerous new accounts with both diverse needs and diverse in markets as our reputation and technology within these markets continue to grow. While in this era of high tech, we are very proud of our advanced technology not only at prepaid, but across UCO. We are equally, if not prouder, of our high touch customer service strategy. In all of our businesses, paying attention to the customer is a corporate imperative. Output had another great quarter with revenue up 20% and bottom line profitability significantly improving. Keep in mind that unlike the first quarter where we had some unique programs such as printing tax documents, the second quarter did not have similar programs, putting that 20% year-over-year growth in better perspective. The output growth strategy is also customer relationship focused. For instance, a new relationship with FundView, a cloud ERP system that is provided to local governments resulted in the addition of 30 new cities as customers over the past year and seven in just the last quarter. The relationship we've built with LA County has resulted in the expansion of that relationship. And we are now handling their check disbursement needs for fees and fines over payments. Where we recently mailed 9,000 checks in one day. And because of our strong relationship in these industries, we added another three energy providers and three electric utilities in the quarter. We will continue to invest in output as we believe there is potential to grow the business. Consequently, we hired a 30-year seasoned print and mail sales executive to complement our existing sales efforts. Let me add a few more developments at output. that are representative of the transformation and integration transpiring across the organization. Output recently signed a toll road customer for disbursement of toll bills. The bills have a QR code that the recipient scans, which takes them to a payment portal built and operated by UCO. And there's more automation coming. For instance, Our last two new accounts are completely electronic with no printer mail service. We will create e-bills that are emailed to customers who, like the Toll Road business, are directed to a UCO-managed payment portal. This should push the proportion of the output's revenues from electronic payments to approximately 40% and climbing. This is much more profitable work, and as a result, expanding outputs gross margins. The story is the same for CARD, where we're focusing on building relationships that has enabled us to continue to add new ISVs. I would point specifically to an ISV with strong government ties, where penetrating many of their accounts, such as toll roads, including the Massachusetts Department of Transportation, Florida Turnpike, Delaware Tolls, and other government organizations such as the City of Miami for Fees and Fines. Why do ISVs keep on giving us more business? Because of our long tenure in the business, pioneering pay fact technology, and our great customer service. And in ACH, we had a growth quarter despite ongoing tough comparables on the large year-ago Voyager volumes. While we will face another tough quarter of comparables in the third quarter when Voyager was still running off, we expect to see performance in the ACH starting in the fourth quarter when there was virtually no Voyager volume to speak of. Our strong growth is also leading to better margins as we leverage our fixed direct costs. In addition, overhead for the second quarter was virtually unchanged from a year ago as we kept a tight lid on costs and continued to focus on improving efficiency and productivity. So far this year, revenues are up 24% on the top line with only about 1% added overhead, which includes the absorption of significant inflationary pressures. The result is another quarter of more than $1 million in adjusted EBITDA, which is now up $3 million compared to the adjusted EBITDA generated over the first half of fiscal 2022. In addition, we delivered positive GAAP net income and earnings per share for second consecutive quarter, which has been an important objective. Consequently, as previously noted, We are reiterating our guidance for the year, although we believe that the second half will be comprised of somewhat slower third quarter, followed by a stronger fourth quarter. As a result, the first half of the year is the best in the company's history, and we expect this to be a record year. Our pipeline is extremely strong, and many of our existing relationships are with fast-growing organizations with whom we are growing. We're in great financial condition, and we can't wait to get back to work every day. And now I'd like to turn the call over to Houston Frost.

Thank you, Louis, and thank you to everyone participating on our call this afternoon. As Louis noted, prepaid had an exceptional quarter, nearly tripling revenue while growing load volume by 48% and purchase volume by 51%. While revenues benefited from the breakage earned on inactive New York City incentive cards, load and purchase volume trends reflect the strong growth of new and existing client card programs. June was our best month ever for both pre-funded card loads and transaction volume, and early figures show continued growth in July. Importantly, this load and transaction volume is largely coming from longer-term programs with recurring and or larger card loads. These include guaranteed income and other multiple load cash assistance programs, as well as corporate expense and other specialty card programs. As UCS card issuing business matures, we believe it's important to build a base of programs that will generate longer-term recurring payment volume. Admittedly, there is a trade-off here. Single load card programs, especially with loads of $100 or less, generate higher revenue as a percentage of load volume than do recurring and larger load programs. And typically, single load program revenue is higher gross margin, although from a net profit perspective, the additional gross margin is partially consumed by higher customer service and operational expense as a percentage of loads. That said, we're confident that continuing to focus on and shift toward longer-term recurring load programs is the right long-term decision. These programs and clients are less price sensitive and have higher switching costs. Building a business that is more defendable and more stable will ultimately be more valuable. That said, we certainly don't plan to turn away any single load card programs. We see our success as being driven by our operational execution, our proprietary processing platform with the flexibility and capabilities it offers, and our relentless focus on the client relationship. This bolsters our confidence in our strategy. Focus on clients and programs where these strengths provide true value. ClassWallet is a great example of this strategy in action. They operate a service that assists academic and government organizations with managing their purchasing and reimbursement process. We first began issuing their cards more than three years ago in 2020. The company's product had a unique need requiring them to be involved in transaction authorization decisions, and we had a solution, what we call external authorization. Today, ClassWallet has grown to be one of our top clients by load and transaction volume. MoviePass is a similar example, a long-term relationship also using our novel external authorization solution. And, of course, we also continue to build relationships in the local government and nonprofit space. Among our many newer engagements is a program with the California Department of Social Services, which will be issuing, which will be using a UCO card to disperse nearly 100 million to eligible individuals who experienced hardship as a result of storms in that state. These programs often take advantage of our transaction restrictions and controls virtual cards, and or consumer choice offerings. But what customers tell us they appreciate most is our partnership, our willingness to jump on a call and troubleshoot an issue, facilitate an improvement, or simply be honest about a mistake and work toward an acceptable resolution. In total, we continue to be on pace to add approximately 80 to 100 new clients this year. While we do expect to see card issuing revenue and gross margin declined somewhat over the next few quarters as income generation from the New York City and City of Houston and other vaccine incentive programs winds down. We are thrilled with the programs we manage today and the business we are building. Our June record load and transaction volume indicates UCO's card issuing business is poised for continued growth over the long term. With that, I'd like to turn the call over to Greg Carter.

Thank you, Houston, and good afternoon, everyone. Card revenues were up once again in the second quarter, led by a 26% growth in our payback business, where virtually all of our efforts and resources are being concentrated. For the quarter, dollars processed were up 2%, and transactions processed were up 15% from a year ago. Lewis noticed some nice recent wins with governmental entities, all of which are from a very strong ISV relationship. We also added a fitness exercise practice management ISP whose software is being rapidly adopted by gyms and fitness centers. To illustrate the dynamics affecting our implementation process and to use one of my dad's analogies, this was way more than the carpenter's old rule, measure twice and cut once. It was closer to measure 14 times. That's okay. While competitors may have balked and walked away, this is what makes us different, and we fully expect this to be a long and mutually beneficial relationship. There was an equally exciting new implementation with an agricultural and ranch supply company. They're already set up with ACH and are now switching all of their e-commerce transactions onto our card platform. Our expectation is that eventually they will move the remainder of their payment needs, primarily on-premises, to UCO, which could be quite significant. In addition to our strong relationship with this firm, they like the flexibility that UCO provides, and of course, we remain price competitive. On the product side, we've made a significant upgrade in our card-present transaction device, which we believe will drive incremental revenues. And I think now we have the strongest prospect pipeline we've ever had, including opportunities arising primarily from trade show attendance with organizations in the veterinarian, fundraising, and waste industries. As with all of the UCO business development efforts, our success is primarily a function of the variety of payment channels and the strong relationships we are building in the markets. For many of our new accounts, we may be their first payments platform. In addition, there's a lot of cross-selling taking place. For instance, as a result of their relationship with Output Solutions, we were talking to a large player in the printing market about how to provide an electronics payment solution to complement their existing business. And in May, we added Stephanie Gonzalez to spirit our marketing efforts and amplify our various initiatives. As previously noted, in the short term, results can be impacted by the pace of new ISV implementations as well as the rate at which they ramp. Fortunately, as we grow our pipeline and engage with an ever greater number of ISVs, the rate of implementations continues to improve, so we are optimistic about the second half of the year with revenue growth returning to the strong trajectory for the last several years. 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.

Thanks, Greg, and welcome, everyone. Thanks again for joining our call today and for your interest in UCO. Let me quickly provide some color around this quarter's results before opening the call to questions. Revenues were up 31 percent to a record $21.3 million, driven by strong growth in prepaid and output solutions. Credit card revenues were up 3 percent ACH and complementary services were up 5% this quarter after being down the last few quarters. Gross profits of $5 million were a quarterly record for the third consecutive quarter, and margins expanded 340 basis points from a year ago. The gross margin improvement reflects a higher contribution from breakage and spoilage, which significantly improved margins in the prepaid segment, growth in our high margin ACH revenues, as well as strong margins at output solutions. Selling general and administrative costs were basically flat with the year-ago period and are up just slightly more than 1% for the first half of the year. For the third consecutive quarter, we generated over $1 million in adjusted EBITDA. For the quarter, we reported $0.01 per share of GAAP EPS, while also reporting one cents per share of GAAP EPS for the first six months of the year. Non-GAAP adjusted operating cash flows as described in our 10Q and earnings release was $1.5 million for the six months into June 30th, 2023. Our cash position at the end of the quarter was $6.6 million, up approximately $900,000 over the first half of 2023. For the first half of the year, revenues were up 24.4 percent, gross margin has expanded 350 basis points, SG&A is up 1 percent, and adjusted EBITDA was $2.2 million compared to a loss of $875,000 for the first half of last year. I do want to call out our efforts to drive interest income, where we have employed investment suites to generate over $300,000 of interest income over the first half of the year. In July 2023 alone, interest income was $160,000. As Louis noted, we expect to meet our revenue guidance for the year but expect to see a slight slowdown in revenue growth and gross profits due to declining breakage and other items. With that, I will turn the call back to the operator to conduct our question and answer session.

We will now begin the question and answer session. To ask a question, you may press star and 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question today comes from Scott Buck with H.C. Wainwright. Please go ahead.

Hi, good afternoon, guys. Thanks for taking my questions. First of all, I was hoping you could give us a Oh, good, good. I was hoping you could give us a little bit more color around what you're seeing with MoviePass and maybe how that business has performed versus expectations. Granted, it's early.

Yeah, hi, Scott. This is Houston Frost. You know, I think generally speaking, MoviePass has performed in line with our expectations. You know, we've continually seen their volumes ramp up. You know, ultimately they're going to be, you know, a fairly significant client of ours. I mean, it's hard for me to say are they going to be number one, number two, number three, number four, number five. But, you know, they'll be in the top ten. And I think last quarter, just by payment volume, they were already in our top 10 clients. So, you know, it's a long-term recurring revenue-type client. It's not a New York City where, you know, we're going to make a ton of revenue in one quarter and then we watch it roll off or, you know, wait for breakage at the end of it. It's going to provide consistent revenue month over month, and that revenue should continue to grow from here.

Thanks, Houston. That's helpful. Second one, I wanted to ask about gross margin. I know it's, you know, mixed dependent, but curious, you know, given the progress you've made so far, where can we expect to see gross margin go over the next 12 months or so?

Are you referring to prepaid? Specifically, are you referring to company-wide?

Company-wide. Sorry, company-wide.

I'll take that question.

There's, you know, obviously the big component is the mix. And, you know, the last few period quarters have been, you know, very positive in terms of prepaid for AQs. You know, Outlook Solutions has been pretty consistent. You know, it might, you know, drop a little bit depending really on the pickup in the ACH business.

All right. That's helpful. Last one, I just want to ask quickly about the acquisition environment. Is there anything out there that could potentially be interesting for you guys, or are you strictly focused on the organic business? We look at deals all the time.

We don't have anything in the hopper, but we're open to acquiring more companies. We have very strict criteria, and nobody's lately has been able to meet that criteria.

All right. That's helpful. I appreciate the time, guys, and congrats on the quarter. Thanks. Thanks, Scott.

The next question comes from Michael Diana with Maxine Group. Please go ahead.

Thank you. My first question is on expenses. So I think Greg mentioned that you hired a senior marketing person In payback, you're obviously spending more money for growth, and yet the G&A expenses are very flat, which is great. There must be a – where there are pluses, there's got to be a minus to offset it somewhere. So what are some of the things maybe you're doing to keep that G&A number low?

Well, the first thing is we hired a new head of marketing for the company. And, you know, that was a replacement. So that doesn't increase SG&A. And then we hired a new senior salespeople. We're always looking for experienced salespeople across the organization. So you'll see us continue to add sales positions. But we're continuing to scale where we need to scale, but You know, we're definitely at the point where we have operating leverage, where we're leveraging our fixed costs and our volumes are going up. So, you know, that's really helping out with OpEx in general. Okay, great.

And Tom mentioned you're generating interest income, which I noticed went way up from sweeps. Could you just tell us a little how that works, Tom?

It has a lot to do with inflation and the Fed. And, you know, and it may be, you know, somewhat temporary, but, you know, we've been, Tom and his team have been really doing well in investing our deposits in a safe manner that are yielding good interest. And we think that interest amount will even go up this quarter.

All right. So, it's not necessarily the sweeps being more efficient. It's the interest rates going up. There's some combination of both.

It's definitely a combination of both. You know, like, we have multiple banks, and we basically went through all the banks and, you know, are sweeping the money, and then, you know, you also have the compounding effect of the higher interest rates. And, you know, Houston talks about his load increases, you know, everything we do as we grow business, as, you know, business changes, all of that factors into the incremental interest income.

Okay, great. And then, Houston, you mentioned again, I mean, you mentioned before guaranteed income programs. Can you give us an update on that? and whether that's something that's, that's growing as far as number of programs or individual programs.

Yeah. Um, you know, I think broadly speaking, absolutely. It's growing. In fact, uh, I guess it was early June. We were at a conference in Chicago, um, uh, called the big conference basic income guarantee. And, um, It was almost surprising to me to know that that conference had been going on for almost 20 years, I believe, but they were just now discussing, you know, pilot-scale, full-fledged guaranteed income programs. So it was just an interesting context to hear about how they've been talking about these in kind of a theoretical or academic kind of way for well over a decade, and, you know, we participated in the very first real pilot program, which is the Compton Pledge, a couple years ago. So what we're seeing are pilot programs turn into, you know, larger programs and also being extended and even saying that there is no end to those programs. and we continue to add to them both through direct sales as well as by partnering with service providers that are kind of servicing the nonprofit and local government space that covers them. So, you know, very positive trends there, and, you know, we absolutely expect it to continue. I think if there's anything on our mind is, that the continued growth will likely lead to increasing competition in the space. But no, I don't think guaranteed income programs are going away. I think direct cash assistance is only going to continue to go up from here, just broadly speaking.

Okay, great. Thank you.

Thanks, Michael.

The next question comes from John Hickman with Latin Bird. Please go ahead.

Hello. Can you hear me okay?

Hi, John.

Hey. Lewis, would you elaborate on your comments about headwinds for ACH in the coming quarter?

So ACH, absent Voyager, continues to grow. So if we take Voyager out of the mix, we're continuing to add new accounts, and those accounts are actually producing more than they would they did last year without Voyager. So ACH is doing well in that aspect. It's, you know, the comparables year over year right now are tough, and they will be for Q3 because we still did a lot of work for Voyager in Q3. But Q4, you'll see the comparables even out, and we should do well from there. We do have initiatives. We're implementing the Clearinghouse Network. We're implementing the FedNow. We do believe that some ACH traffic will go to those real-time methods. We're early entrant in those two payment channels. So because we're early, we'll get some new business out of it. And all that goes into that ACH network. in a complimentary services bucket. So you're going to see some growth there.

Okay. And then on the PayPak side, you mentioned an ag supply. Was that an ISD or is that a retail chain?

It's actually more of an enterprise account, not a Fair Play ISV, but given the size and the requirements that they had, it was a good fit for UCO. But to be clear, it's not an ISV.

Okay. And then let's see. I had one more brilliant question. What was it? I guess that's it for me. Thanks. for taking my questions. Thanks, John. Thank you. Thanks, John.

As a reminder, if you would like to ask a question, please press star and one to enter the question to you. The next question comes from Gary Prestapino with Barrington Research. Please go ahead.

Hey, good afternoon, all. Yeah, my, Lewis, my questions are all around this Fed now. Is this going to be a positive for you, or does this take away from your ACH business?

It's going to pull away some ACH traffic, not much. I mean, ACH is still the cheapest method to send a payment. ACH you can still do same day. So it fits for a lot of different applications. You know, nobody's going to pay their mortgage real time or their life insurance real time. It's, you know, that same day or next day is fine. So, ACH is always going to be around. In fact, ACH globally, the volume continues to increase. And now FedNow, anything with real-time payments is definitely going to grow. And we're there. And, you know, we have a strategy being diverse in the payment channels that we offer. So, we're going to be implementing FedNow. FedNow is an opt-in program for banks. Even though every bank has access to a Fed terminal, it doesn't mean that they can accept FedNow payments. So it's going to be a limited rollout, just like the Clearinghouse has been a limited rollout. So the Clearinghouse is a network that Zelle runs on. And I'm sure if you've used that before, you realize that you can't send payments to everybody. The clearinghouse today is primarily just credits and segment fed now. And, you know, for it to be effective payment mechanism, it needs to be credits and debits. And so we'll see that the debit, once the debit portion rolls out, then it'll have more applications available to it. But we're implementing both and We don't care which one wins. We think the margins are going to be similar to ACH. And we think our ACH business in itself is going to continue to grow.

Well, that's what I'm kind of asking. I mean, you kind of danced around it here. I mean, with your ACH business, as I understand it, that is two or three days payment, like you said, on a mortgage. FedNow is instantaneous. So you will be capable of doing both ACH and FedNow once you hook up to them. I realize FedNow has not proliferated. It's just recently come out. But if there's business that's going to be pulled away, what would it be pulled away? What are you doing right now that has to have same-day settlement?

So ACH, we can do same-day ACH. We can do next-day ACH. That technology exists. And we do that every day. We do a lot in real-time payments today. We call that pinless debit. That's the same technology that you would use if you're making a Venmo payment with somebody. That's pinless debit. It goes across the debit rails. So, you know, it doesn't really matter. When you're looking at UCO as a company, it doesn't really matter what payment method is going to win. We're involved in every one of them. And FedNow, And the clearinghouse, once they implement debits, will become, you know, have more applications. Right now, the clearinghouse is good for sending money. And it's not good for somebody receiving a payment, a merchant receiving payment. So, clearinghouse or Zelle is pretty much person-to-person payments. So, you can see they've limited themselves. you know, in the way they're rolling out. But when they get debits, you know, it's going to be important, and it'll shift. You know, the payment world shifts all the time. You know, we had a big shift in COVID where we went from, you know, people willing to insert their card or swipe their card to contactless. You know, Houston's team, you know, Before COVID, we'd issue more plastic cards. After COVID, we issued more virtual cards. People didn't even want to touch their card. So it didn't matter that that shift occurred within prepaid because we were in both channels. And that's important to understand about our company is that we believe that we need to have all channels. And it's very unlike our competitors. Okay. Thank you. Thank you, Lewis.

This concludes our question and answer session and concludes the conference call. Thank you for attending today's presentation. You may now disconnect.