Usio, Inc.

Hello, and welcome to the UCO second quarter fiscal 2024 earnings conference call. 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. Please note, today's event is being recorded. Now, I would like to turn the conference over to your host, Paul Manley. Please go ahead, sir.

Thank you, operator, and thank you, everyone, for joining our call today. Welcome to UCO's second quarter fiscal 2024 conference call. The earnings release, which we issued today after the market closed, is available on our website at uco.com.us. under the Investor Relations tab. On this call today are Louis Hoke, our Chairman and CEO, Greg Carter, Executive Vice President of Payment and Acceptance, Michael White, Senior Vice President and Chief Accounting Officer, Jerry Uffner, Head of Carditioning, and newly named Chief Product Officer, Houston Frost, will be available during the Q&A. 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. Let me start off with some highlights from this afternoon's release. Momentum remains strong into the second quarter with total payment dollar processing volume growth accelerating to 24% as all of our electronic transaction processing businesses generating double digit growth across all their key processing metrics. Once again, second quarter results were in line with our expectations. Reflecting on our profit prioritization mandate, we reported positive gap net income and earnings per share for the quarter. Additionally, cash was up this quarter even after expending $105,000 to repurchase 65,519 shares of our stock at an average price of $1.60. In keeping with a practice being adopted in the payments industry, as noted in a press release, interest earned on merchant funds held for payment processing and reserves are now classified as revenue. This change recognizes that interest income is a key component of our company's core operations. The interest earned on our corporate cash account continues to be classified as interest income below the line. So we are gap net income positive, generating cash to continue to invest in our growth initiatives, buying back our own stock, and building a backlog. All great signs of a healthy, thriving enterprise. Just a few more comments on our financial results. The slight year-over-year revenue decrease was due to the planned wind-down of the New York City COVID program. Without this contract, revenues would have shown an increase. Margins continue to reflect the changes in our revenue mix, and second quarter margins primarily reflect the impact of the New York City COVID initiative program, which were better than a year ago. However, the renewed growth of our most profitable segment, ACH, as well as significant improvement in the profitability of prepaid are certainly encouraging developments. We expect to help buoy margins. Additionally, on a sequential basis, a more accurate comparison since the New York City program was winding down in both quarters, margins have improved. SG&A was up slightly due to an increased employee compensation and some incremental marketing investment. I'd like to reiterate that our goal for 2024 is to keep our overhead spending growth rate below that of revenue, and we fully expect to meet this objective. This is an integral element of our strategy to increase operating leverage to improve UCO's overall profitability. In summary, another fundamentally solid quarter that did not benefit from any individually large programs. We continue to be optimistic as our base of recurring business is growing and represents a solid foundation on which to layer some recently signed new business that we expect to ramp, potentially representing a step change for UCO. Due to the success of our profitability-focused initiatives, we are raising our full-year adjusted EBITDA guidance to a range of $4.25 to $5.0 million and expect continued improvements in our liquidity. We believe we will increase full-year 2024 bottom-line profitability compared to 2023, and that has been our top priority while setting the table for even greater future performance. Now, with that, I'd like to turn the call over to Greg Carter.

Thank you, Paul, and good afternoon to everyone. CARD once again set an all-time quarterly record for transactions process and achieved our second highest all-time record for processing volumes, which were up 10% with transaction volumes up 19%. All of our growth is in payback as our legacy non-ISV portfolio continues to trip in line with our overall CARD strategy. We continue to grow organically, and there are a number of ISVs currently in implementation. For instance, we just implemented a company that provides operating software for independent headhunters. This gets us into a new industry vertical, and I feel very optimistic that this will be a meaningful account, not just for CARD, but in this case for ACH as well, another illustration of our cross-selling success. Another ISV that has been implemented and is up and running is a company that is similar to our current client, Fitly. They provide software management systems for gyms and fitness facilities. In all, there are 20 ISVs that are in various stages of implementation that will contribute to future revenues. I should also note that Payback continues to see virtually no attrition. That supports our organic growth strategy in that as this stable portfolio of merchants grow, our processing volume naturally grows with them. I'm also pleased with the progress and improvements we are achieving in our marketing activities. We remain strong on social media, We've revamped our website, and we've added some new marketing resources. As a result, the pipeline remains strong. Last quarter, we announced that we signed an agreement with a leading web-based ERP ISV whose customers process over $1 billion in annual credit card volume. That program is live and moving through the implementation and integration process. Right now, we are making progress with our non-franchisee merchants, Two of these merchants have completed the enrollment process and are awaiting the integration phase with the ISV. And we are in the process of boarding a janitorial sanitation supply company, which we expect to be our first customer officially processing with us through this ISV. We continue to operate and execute towards the plan. This program should ramp over time, but it's rolling out a little slower than they indicated it would. For some perspective, one of our larger ISV customers, PracticeSweep, went through a similar digestion period, and is now in our top five highest-performing ISVs. It's an integration, and it takes time. So we'll provide additional information as it becomes available. KFAC has been growing at a double-digit rate without a single large account, and we believe our activity levels support our goal to sustain our growth with the expectation that when this ISV ramps, it will contribute significant incremental processing volume. Now I'd like to turn the call over to Louis Hoke, Chief Executive Officer, to talk more about our other businesses.

Thank you, Greg, and welcome, everyone. It was another solid quarter that was in line with our expectations and one that enabled us to raise our guidance for 2024 for adjusted EBITDA, increasing the top end of the range to 5 million. Since Paul provided many of our key financial metrics and Greg provided an update on CARD, let me quickly go through our other business lines and additional corporate highlights. Starting with ACH and complimentary services, it was our best quarter since the third quarter of 2022 and our fourth consecutive quarter of recovery. Electronic check transaction volume was up 10%. Return check transaction processing volume was up 13%. and electronic check dollars processed was up 36%, all as compared to the second quarter of 2023. Also, all these growth rates accelerated sequentially compared to the first quarter of this year. Since this is our highest margin business segment, it is encouraging to see the momentum building. One of the reasons for our success is that we are not only closing more standalone ACH deals, but we are also closing deals that require a pennless debit solution since we are among a few providers in this space that have this highly complex technology. This capability, along with the growing number of ISVs incorporating ACH, is helping us secure more deals and achieve significant growth. Last quarter, I mentioned our real-time payments initiative with Clearinghouse and FedNow. This quarter, I'm pleased to announce that we boarded our first real-time payment customer using the Clearinghouse. We expect to also go live with FedNow shortly. Both real-time payment channels are integrated into a single tech stack, and it is already available for most of our existing merchants' integrations. Both of these payment channels should have a strong adoption once the channels allow for debiting of accounts in addition to the current ability of crediting accounts. The ACH sales pipeline remains full of additional opportunities. For instance, last month in July, ACH recorded its best month since August of 2022, up 28% on transactions, 29% on returns, and 82 percent on dollars processed. So you can see the momentum has not slowed. In output solutions, we continue our strategic growth initiatives with electronic documents delivered exceeding 20.7 million, a quarterly record, and up 6 percent sequentially from the first quarter of this year. Once again, we delivered more documents electronically than by mail. Per-unit revenue for electronic delivery is below that of mail, and it's contributing to a year-over-year decrease in output revenues. Output continues to add new accounts. In the quarter, we added seven new cities where we will be providing services for either water, electric, sewer, energy, or other municipal buildings. So the business is fundamentally growing. Last year, we invested in new equipment that gives us the opportunity to bid on jobs that we could not previously execute due to either reconciliation or volume requirements that exceeded our capacities. Our new equipment has already landed us a sizable program to handle the printing and distribution of 500,000 checks for a bankruptcy distribution that started in late July. There is another sizable opportunity virtually on the doorstep that we could only contemplate by having this equipment. While these big jobs entail longer sales cycle, they represent the opportunity to raise output solutions to a new level and better leverage our fixed investment to improve profitability, which is our number one strategic priority. Card issuing continued its momentum in the second quarter. total dollars loaded on prepaid cards exceeded $133 million, which was an all-time record and was also the fourth consecutive quarter exceeding $100 million in loads. In addition, prepaid card transaction volume increased 58 percent, purchase volume increased 39 percent, while total card load volume was up 55 percent all compared to the second quarter a year ago. We now have more active cards in our system than ever. Card loads are an important forward-looking metric, and we expect this accelerated load volume to continue in the third and fourth quarters. We continue implementing our strategy to build a portfolio of corporate expense, general-purpose reloadable GPR cards, and other long-term programs with the intention of increasing our recurring revenue. And in keeping with UCO's overall top strategic priority, profitability increased dramatically in the quarter. Our relationship with Mobile Money continued to expand with their successful launch of a new instant issue general purpose reloadable card program at hundreds of amusement parks, water parks, and resorts through their reverse ATM kiosk technology. We also saw continued growth with our card issuing customer, Class Wallet, which recently expanded their relationship with the ECO by adding our ACH services. We remain committed to expanding our partnerships with governmental agencies, nonprofits, and related organizations. Additionally, we have intensified our marketing efforts, including recently co-sponsoring a successful webinar with MasterCard. Our card issuing team completed over 20 implementations in the second quarter and are working on several more, including nonprofit, GPR, and funds distribution programs. We are continuing implementations of unique and key gift card clients in the third and fourth quarter of this year. We are also working on new functionality and features, including upgrading to our client portal, expanding our relationship with MasterCard by adding additional fraud protection and other MasterCard services to our reloadable products. I'm very pleased with the progress. Finally, UCO continues to strengthen its financial position, having added $400,000 in cash to our balance sheet in the second quarter of 2024. We now have $7.5 million available to support our growth initiatives, and we believe that balance should grow throughout the year. I also want to echo Greg's sentiments that we remain very excited and essentially on track with the large ISV that we announced earlier this year. This is a large implementation, and it takes time. we indicated it was expected to seriously ramp in 2025 with some prospects that early adopters would come on board later this year. Those rollouts have been a little slower than anticipated. Otherwise, nothing has changed. Since it's merely a matter of when they'll ramp processing, forecasting revenues over the short term is challenging. Also, in addition to the 500,000 check order currently in process, our output solutions team has an understanding with a prestigious bankruptcy administration firm that UCO will be handling the issuing and mailing of potentially significant number of checks associated with a much larger bankruptcy distribution. Again, the timing is uncertain, but if the deal is closed, it will create a significant revenue opportunity for output solutions. If any of this work ramps in the near term, there's still time to meet or exceed our initial 2024 revenue guidance. However, we're not counting on that. So, correspondingly, it looks like revenue growth will come in somewhat below our initial guidance at between 3% and 7% for 2024. But more importantly, adjusted EBITDA for the year will be equal to or even potentially better than the originally anticipated 4 to 4.5 million. We also expect full year earnings per share to be between zero and three cents a share. With that, I would like to 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 then 1 on your telephone keypad. If you're 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 2. At this time, we'll pause momentarily to assemble our roster. The first question comes from Scott Buck with H.C. Wainwright. Please go ahead.

Good afternoon, guys. Thanks for taking my questions. Louis, on payback, I understand the slower implementation. I'm assuming that is on them, not a capacity issue on UCO's ability to onboard. Is that correct?

No, definitely. We're ready to go. And, you know, our systems are very standard. So, it's not only our new large IS funding, but also a group of other ones that we would save during the year. So, the business is there. It's ours. And it's just not new.

Okay. And I think you touched on it there in your prepared remarks. it's not, you're not at risk of losing any of that volume, right? I mean, it's all coming over at some point.

Yeah. It's already signed these deals and, you know, some of these guys use big flash cuts so they just announce to all their home customers that they're switching. That's obviously their preference. But more of ours is implementing segments based on different verticals that they've been providing services in are, you know, different levels of customers. And that's what we're experiencing now is roots. Right.

Okay. That's helpful. And then you guys have a nice step up in gross margin. I mean, I understand mix can drive very different quarter-to-quarter gross margins, but As we think longer term and as the business continues to mature, do you think there's some room to push gross margin, you know, kind of regularly in that 25% plus range?

It's definitely a goal for us to try to get there. There are some economies that we haven't achieved yet. So, yeah, 24, 25, you know, . Okay, perfect. That's great.

And then last one, for me, it sounds like there's going to be a little bit more marketing spend. Could you give us a sense, you know, kind of percentage-wise, how much you're increasing spend there and maybe where some of those incremental marketing dollars are going?

Yeah. Well, firstly, I don't think we're going to spend any more money. We're leveraging relationships. We're leveraging tools that already exist out there in the beginning and in the Okay, great. That's helpful. I appreciate the added color, guys. Thanks again.

Again, if you have a question, please press star then 1. There are no further questions. This concludes our question and answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.