Q3 2022 Triumph Bancorp Inc Earnings Call
So they need to provide tastic feedback for us around this medium as you can see we took it to heart and as a result, we're trying something a little different today as we continue to explore this method of communicating with you our shareholders.
Today is just another step on that journey, and we'll continue to tweak around the edges as we go forward.
Bright this morning, where live to the world and so this is all pretty new to us hopefully it all goes well on that note one of the benefits around doing something different like this is it gives us the opportunity to bring you along side us with us on this adventure. We appreciate your partnership in <unk>.
You again for joining us this morning.
I'm joined by Aaron graft, our CEO , Fred Bosch, our CFO , Melissa forming our president to try and pay Geoff Brenner, our CEO of triumph business capital and Todd Ritterbusch President of TDK Bank.
Last evening, we published our quarterly shareholder letter that letter and our quarterly results will form the basis of our call. Today. However, before we get started I'd like to remind you that this conversation may include forward looking statements. Those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ the company undertakes no obligation to publicly revise.
Any forward looking statements.
For details please refer to the Safe Harbor statement in our shareholder letter published last evening all.
All comments made during today's call are subject to that safe Harbor statement.
With that I'd like to turn the call over to Aaron for welcome and to kick off our Q&A Erin.
Good morning, Thank you for joining us as you saw in our letter our earnings this quarter were below expectations.
We're a few contributing factors to that first we began to see a slowdown in free.
Second this quarter's results reflect revenue associated with our general factoring and equipment finance portfolios that we sold last quarter.
But more importantly from a long term perspective, we have made material progress on our payments network and we've done that despite freight headwinds specifically, our invoice volume increased six 6%.
And even more importantly, our network transaction volume increased 21, 7%.
Regardless of headwinds in freight or market volatility in weather at last quarters or years, we're committed to our revenue goals and to being EBITDA positive and try and pay in 2024, and if you couple that with the profitability of our banking and factoring segments. We have a lot to be excited about.
With that introduction, we will turn it over for questions.
We will now move to Q&A, if you've dialed into zoom and we'd like to ask a question. Please use the raise hand feature at the bottom as youre seeing window once called upon please feel free to one mute turn on your camera and ask your question.
Our first question comes from Matt Olney from Stephens, Matt feel free to ask your question.
Hi, Thanks, good morning, everybody and thanks for hosting the call.
The Tpa payment volumes Aaron you mentioned those were pretty flat this quarter and I. Appreciate part of it is going to be the lower invoice prices that are out of your control.
But im curious how youre thinking about the ramp of Tpa volume over the next few quarters.
I appreciate where some of the larger customers are.
In the Q, a PPA integration, but also T pay adoption.
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Alright perfect.
My question is on your point, Aaron about Tpa payment volume.
You mentioned they were pretty flat this quarter I mean, the number of inputs to do that but the payment volume was flat obviously that's out of your control to some degree I'm curious, how you're thinking about the ramp of Tpa volume over the next few quarters, just trying to appreciate where some of the larger customers are in the queue.
<unk> pay integration and Tpa adoption.
That's a great question, Matt. Thank you for that and I'll take that one Aaron if you don't mind.
So when we look at Tpa volume Youre right. There are a lot of contributors that are out of our control like the average invoice price, but one thing I do want to point out is that we have increased transaction volume, 6.6% quarter over quarter, which is a huge improvement.
In spite of the headwinds and so we're excited about that are conforming transaction volume has also increased by over 21%. Another another point that is at an impressive feat by our team considering what we're seeing in the market. When you think about tier one or the larger freight brokers coming on board.
Youre right. We don't have one that's in our sights for to go live in Q4, So we wouldn't expect that to happen, but they are lined up in the integration process and our pipeline is very robust when it comes to those larger customers they take longer to get on boarded right now with peak season for for all these <unk>.
So they're focused on getting through the holidays.
In the meantime, we're adding the smaller brokers and getting them in play for.
Network as well so we added 18 last quarter net new freight brokers. We're excited about what we see in our pipeline the integration team is quite busy.
Them, all onboard but to your point, Matt tier ones are going to be more of first half of next year.
Yes, that's exactly right and Matt specifically.
And I know you're thinking about it from a model perspective, and I think any investor would.
When we called out the $15 billion in volume and that's an approximate number which just like what we saw with try and pay this quarter as the freight market moves that number is going to move.
Italy, we would be able to express that number to you not as a volume number but as a revenue number.
And we have some thoughts around that but we're.
Early enough in this process that making a revenue projection and the timing of it we're not ready to do but to be specific Schneider does not count in that $15 billion Schneider was already a client.
For payments, we just added audit capability, which allowed them to do network transactions. The 15 billion, we called out the bulk of that we expect to come on in the first half of next year, because as Melissa said the fourth quarter for freight brokers is an exceptionally busy season and most of them go into code freezes as a result.
Of that.
So I can't tell you the exact timing of when it will happen, but I can say, we expect the bulk of that volume to come on in the first half of next year and beyond that there are a whole lot of smaller brokers and longer term conversations that are happening and I go back to what I said in the opening we're very excited about the pipeline.
And frankly these headwinds in freight have created an opening for us to discuss the value proposition for trying to pay in an entirely different way than we did before because it's not just about how can I cover these loads in the tightest freight market, we have seen in my career now.
People are worried about how do I get more efficient, which has been played right into the try and pay story. So I hope that's helpful.
Yes. That's helpful. Thanks for that and then just as a follow up I think you mentioned conforming transactions.
What you wanted to highlight in the quarter I think it was up 22%.
Remind us where you think that the level of conforming transaction can ultimately go.
What's the path to get there or said another way of that once you achieve that $75 billion of payment volume what percent of those do you think will be will be conforming.
Go ahead, I'll take that Eric So so theres a lot of factors that go into play there and when you look at our brokerage freight payments today, we're at over 34% of those payments our network, our conforming enabled which means the payee on the receiving end of those transactions.
Can get access to the data that we provide them the network. That's a huge feat and our goal is to have all of our payment volume be conforming as we look to integrate deeper integrations with our freight brokers. Our team is working hard to get that done where we think that the.
Biggest points.
<unk> transitioned for the network is going to be when we can provide factoring companies and carriers at least 15% of their payment volume that they receive and process as conforming transactions thats really going to be where it moves the needle and allows them to be able to make meaningful changes to their day to day processes and allow them to innovate.
And create more efficient ways to do business, we're delivering about 5% now we can see that with triumph business capital and what they receive from <unk> pay and conforming transactions and we again, we expect that 15% that's when real development real process changes can happen within that.
The organizations to create that value that we're talking about that the network will provide.
<unk>.
Just to say it.
What Melissa exactly got right, but just as you sit and look at our model.
<unk> 75 billion of payment volume. The first thing I would think about if I were you is 65% of those payments are likely going to factoring company.
That is the candidate for a network transaction Thats. The primary candidate could happen outside of that but it's probably not. So then if you think about that 65% than it is just a modeling exercise of what's the adoption rate among the factoring community to except network transactions and Melissa was exactly.
Right right now and you shouldn't missed this one out of every six payments made to try and business capital or 15% of their payments comes from trying to pay and that would be a wonderful proxy for the rest of the industry like we pay more carriers and more factoring companies than any one app.
<unk> in the market has ever done.
One out of six is the total payments if we think about conforming payments in other words, where the pay or has given us both the remittance information and the audit information that's one out of 20 payments or 5% exactly like Melissa said and just to echo what she said.
Think about it from the perspective of a factoring company who's going to bear the primary cost of that network transactions, we believe and we can model it internally that once triumph business capital or any factoring company gets roughly 15% of all of their payment volume coming through as conforming.
They can start to reorganize their staffing and enterprise resources models to accept those transactions in an entirely different way and a very profitable way for them. So that's how we think about it you start at the $75 billion you worked it down to the factory transactions and then you make some assumptions about market penetration and don't lose sight of the fact.
That we still monetize payments made away from network transactions, we monetize every part of the process. It's just that network transactions delivered the most dimensions of value to the PE, which include factoring company.
So those are going to be the most profitable for us.
And area to add to that I mean, when you think about network transactions and the monetization of that we can take the same invoice and throughout the participants monetize it multiple times and that's that's the network effect for trials PE and recreating that value to each participant in the transaction and so it is just <unk>.
To build on itself so that's exciting.
Got it thanks for taking my question guys I'll hop back in the queue.
All right. Thank you Matt next question. Our next question comes from Gary Tenner from D. A Davidson Gary go ahead.
Thanks, Good morning, everybody.
Good morning, Gary.
I wanted to ask about.
Kind of where your expectations are for.
Invoice prices, obviously, you had in your CEO letter.
The breakeven spot ready to I think $2 22, a mile given where spot rates have already fallen and we've seen a little bit of pressure on invoice prices, but not really a dramatic level of pressure at this point.
Where do you think average invoice size heads I mean, obviously if volumes are lower and there's a compounding effect of lower invoice prices, it's a little more meaningful to top line revenue.
Jeff why don't you take that happy too.
So is it possible to say what's going to happen.
Invoice sizes, we project is going to continue to be a very slow decline. So if you think of a balloon that has a very small hole in is we just have a very gradual leak and that's what we've seen.
One thing we're doing to combat that because we can't control that moves to absolutely grow our presence in the large fleet sector.
And maximize the number of invoices that we're buying on a daily basis. If you look at our year over year numbers, comparing where we are year to date right now going into Q3 versus where we were a year ago, but it's actually a 20% growth in number of invoices. So that's a good indicator that we're winning and we're growing the number of invoices and whatever that averages with slides.
Hi. This is Russ the goal is to have the most number of invoices possible bouncing up against that that's the part we can control.
Yes exactly.
Sorry.
<unk> called this out and I think the reason for your question is because every hundred dollar move in invoice prices.
Is a $10 move $10 million move in revenue.
But two to pile on to what Jeff said.
And what you saw in the letter.
I struggle to see how we will return in the spot market given current market conditions, the 500 600 or $700 invoices.
It's just.
No matter, how soft the market yet.
People are not going to haul freight at a rate at which they are losing money. So this is not an economic predictions.
But I think I think youre going to anchor around that $2000 number it might be on those just under it it could be slightly over it.
I mean, one of the things that Jeff and the team have done a great job we've on boarded.
Over 3000 clients this year.
And out of 12, and what that means is some of these clients are finding that they can't breakeven and so their parking their truck and they are going to work in another industry or they're signing on to work for a larger fleet and without those invoices being around $2000 an invoice.
We struggled to see and again theyre shorter hauls longer hauls, but.
Aggregated on everything we do I think we can say, we struggle to see how any trucker could hit.
To be EBITDA breakeven.
So.
That's our best estimate of kind of where the pressure point is.
Of where truckers will continue to accept spot market freight.
Gary if I could just add on interesting data point, if you will.
Look at the interplay between average invoice size and the number of invoices. We purchased in Q3, if we had the average invoice size that we had in Q1 with our volume purchased in Q3 that would have been the best quarter in company history.
On the things we can control, we're pressing forward and growing we just have to wait and see what happens with the market.
Alright.
Thanks, Thanks for that and this is I guess a bit of a follow up to that but.
The last call. It 18 months, you've had the benefit of call. It a windfall I think you put it is called try business capital a golden Goose and you're in your letter and that's kind of shielded.
On a consolidated basis, the cost of investing and trying to pay.
Given kind of the revenue.
Decline, maybe some further decline in invoice prices et cetera, how do you think about kind of consolidated profitability at the company over this period of time, we're continuing to invest.
And track that continues to operate at.
A pre tax loss.
Yeah, that's a great question and I have a lot of thought about this so I will try to Gary consolidate them.
First of all.
By the time, we talk to you next quarter.
Half of our loan book will have turned over three times.
Just the way we're constructed is different because if you think about triumph business capital. It turns every 30 days.
So.
We've talked before about we try not to take credit risks, we don't take interest rate risk and we live with revenue volatility and if thats true.
And how I would characterize the last 18 months is like when you're in the airport and you're on one of those people movers and Youre walking in is pushing you forward. It makes you look faster than you are.
And how I would characterize today is it's neutral.
And how it may be in 2023, especially the first quarter I don't know, but where we think it's possible that it actually could be a treadmill running against US okay. So true headwinds.
So what does that mean, what does it mean for investment and try and pay and for the enterprise itself.
Well the first thing is.
Assuming try and pay we're breakeven.
Our ROA would be over one 5%.
That's the business is profitable and Thats, because triumph business capital in the community bank have been constructed to be profitable, whether we have tailwind or headwinds, whether the treadmills running against us or for us.
Second thing to remember is this the expense growth and try and pay two years ago was 200% year over year.
And between last year and this year, it's 50%.
Between this year and next year.
It will be less than 20% unless.
We get far more wins than we can even imagine so if we're sitting here a year from now and we're telling your expense growth and try and pay us 30%.
And we're going to be very excited about that because that will be variable expense growth associated with volume that was beyond our expectation, but we spent two years building. The foundation to go run this play and it has required.
Life to date $200 million of investment.
And so we're not going to shortchange, what we're doing we are committed to those 2024 goals because you know and I know and I think every investor knows if we hit those 2024 goals the valuation from where we sit today to where we will be at that time is materially different.
As you said.
We had the benefits of tailwind while we were building. The foundation that is now done we are sitting on excess capital. We have a robust pipeline. We have added most of the talent we need the senior leadership you've seen the announcements.
So if we grow expenses less and try and pay in 2023, it's not because we feel this need to manage the overall enterprise to a certain short term level of profitability. Its just because we've already made the investment.
So we know we have to be profitable, we're not a private equity backed firm that Ken for three years disappear and go do something and then hope it works out at the end that's not our story, we have to be profitable between here and there and we will be profitable between here and there, but we will not hesitate.
To be opportunistic and to invest in the best talent in technology. It takes to deliver on the promise.
So.
That's how we think about it.
That gives you some guide rails for how we think about expense growth and try and pay which will obviously moderate expense growth for the entire enterprise and whatever happens in the short term will happen and we kind of view that as noise as long as we are profitable and we maintain credit quality.
We are committed to what we told you our goals are because if we hit those then everyone wins.
Alright, Thanks, Dara thanks, everybody.
Thank you Gary and our next question comes from Brad Millsaps from Piper Sandler.
Hey, good morning, guys.
Just wanted to follow up on.
The last point you made Erin.
Got it.
I think at one point you mentioned that.
$100 million of revenue you might be.
50% efficiency ratio in that business, but it looks like as of today youre running at about.
$60 million in annualized expenses, you just said you expect 20% growth there.
That would put you closer to 70.
About that business.
I just would add maybe.
At $100 million of revenue that would imply maybe twentyish at $1 billion of net income or not too low. They are some of those expenses going to fall out.
Really trying to think about the contribution when you get to that level with maybe a little bit less than I. Initially thought, but hopefully you can kind of clear that up a little bit.
Thanks for that.
Take that one.
What we're aiming to do with trial pay exiting 2024 is three key metrics number one.
$1 million in revenue as you mentioned.
<unk> two <unk>.
EBITDA positive.
Want that number to be.
A contributor rather than a drag on our earnings and number three we think that it takes about $75 billion.
Payment volume to get there, but the expense load that we have to add between now and then that.
That provide some guardrails for some discipline in order to be EBITDA positive at that point, but the margins are at that level are not going to be.
50% there that's for another day, when we're at a bigger scale.
And a couple of things to add onto that Brad is as we think about try and pay and.
When we think about long term targets.
We think this business will should and it will operate at over a 70% gross margin, which is different than how bank investors talk about efficiency ratio of payment investors in fintech investors talk about gross margins.
And this is a fast or a <unk>.
Payments network business, that's our target. So that's number one number two.
If you just step back and do unit economics if.
If you take 75 billion in payments and you assume youre going to generate $100 million in revenue and you assume the average invoice size is $800.
None of us know, what it'll be but if you just assume that to be true.
That's 42 million invoices.
And to get to a $100 million, that's $2 40 of revenue per invoice.
Our firm conviction is that the revenue per invoice is the value proposition continues will be far greater than that.
And you can see that if you look at the revenue per cohort the longer we stay with a customer the more value proposition that is born.
And so in year, one at that volume.
But it takes <unk> 75 billion to generate $100 million in revenue, yes, do I think it's plausible that that same volume of payments generates $1 three ex that revenue in the subsequent year I do.
I do because we see fraud mitigation and carrier visibility and some other things we haven't even talked about that our value proposition, we deliver back to our payers and our pace.
So the short answer is.
In exiting 2024, it will not be a 50% efficiency ratio and as we said that's not a terminal goal that's an interim that's.
An interim goal of being EBITDA positive and delivering the brand promise to the market, but over the longer term.
Every decision we make goes through the grid of can we do this at scale and can we do this at the profit margins required to get the valuation we think this deserves and.
I am absolutely convinced we will achieve that.
Aaron if I can just add on to that you spoke about the fraud mitigation. When we started the Payment's network, we knew what our core transaction was going to be to create the transparency and deliver the source of truth to all participants in that transaction.
Very clear direction, we knew what we had to go build and what we could do with it.
But what we're learning is the ability that we have in the view that we have on carriers and their transactions.
The possibilities are limitless there is so much activity fraudulent activity in the industry today and as times get tougher in transportation, they're just going to continue to grow and we see daily Opex.
Opportunities for us to be able to share information with our customers about carriers that have bad behavior or that look like they're doing something wrong and so we're getting asked every day what else can you do can you show US. This information can you help us here can you help us there and we're taking that to the table and figuring out how can we bring.
Additional value to our existing clients and help them mitigate the fraud and the risks associated with these transactions. So it's exciting exactly.
Okay. Thanks, Thanks for that Aaron's business on in your letter talking about how you guys are underwriting equipment suites, you mentioned that some small carriers are choosing to maybe partner trusted invoice prices can you.
Maybe add a little more color are you worried about.
Maybe I won't say credit issues, but.
Brokers running into problems, where you're having to deal with equipment.
Could be upside down or we are we far from that just curious because you did spend some time talking about sort of how you guys are approaching that space in your letter.
Question.
In the letter we talked a lot about versus litigation, we talked to some extent about the risk mitigation efforts. We're taking it is important to recognize that as equipment prices have gone up we havent always continue to finance the equipment at 100%. So we're requiring down payments now which gives us some support in the event that equipment prices decline.
We also have the benefit of having deep visibility into the financials themselves and long relationships with a lot of the equipment finance borrowers that we serve and so we feel really comfortable that those players will be able to withstand the cycle.
At the end of the day.
The reality is that we see the economics of those businesses looking much better than the industry as a whole. So we do feel comfortable about where we stand where we are headed.
And then maybe final one for me also you highlight in the letter you pointed out very bullish that you guys have in your opinion $200 million.
Capital that can be above your internal target can you highlight maybe M&A possibilities with share buybacks can you.
Kind of talk about your appetite both with the stock where it is where you might be more aggressive with the share buyback.
Okay.
And we highlighted it for a purpose because it's something we talk a lot about internally, but there are two possible uses for this capital and I think we.
We've been intentional over the last three years about Stewarding our capital.
If you remember the hub Trane acquisition, we steward of our capital in order to be able to do that without.
Without diluting investors.
So now where we sit today, we have twice that amount of cap.
There are really two options.
And they're not mutually exclusive perhaps we will we will do them side by side number one.
As we will invest to expand the reach and the resiliency of the payments network and that would specifically be in the shipper space, which includes investing in thinking about creating freight audit and pay opportunities that we can that we think brings value and more redundancy.
<unk> and carriers into our network and so we continue to look at those opportunities and the good news about what's happened in the market as revenue multiples.
For companies in that space don't look like they did a year ago, because money is actually worth something now.
Second is and we've said this before.
B ability.
To buyback our own shares if the market values, the intrinsic value of try and pay at zero.
That's that's a pretty.
Simple analysis for us so.
What's interesting now and this is where we talked about taking advantage of headwind most of those are very real and very actionable.
And I can't tell you the exact timing.
Of when and how and what.
But you will see activity for us between now and the end of the year on one or possibly both of those fronts because we firmly believe.
That.
The enterprise value of try and pay alone at that 2024 target is greater than our entire market cap right now.
And Mark as I mentioned, we have a very profitable community bank that has.
Really good deposit quality that we've invested in and we have a factoring company that.
Notwithstanding headwinds is going to generate 3% to 6% pre tax ROA at scale. There just arent a whole lot of other people who can do that.
And so revenue volatility, it's not fun like none of us enjoy coming in here or talking to you when we missed expectations, but if you were to get US all in a room and say do you believe in the long term value proposition and do you think you can take advantage of what the market is doing right now to a person we would.
I'll say, absolutely and so I think youll see us take steps.
As opportunities are given to us and right now I think theres an opportunity in front of us to.
To deploy capital in a way that will create long term value for our shareholders.
Thanks, Dan I appreciate the color just wanted to go back in queue.
And our next question, we'll go back to you Matt Olney from Stephens. Please go ahead.
Yes, Thanks, Tom.
On Tpa I'm thinking more about B and I think one year ago, you disclosed a framework.
Our various fees that you hope to achieve longer term tpa.
Factors subscription fees network fees syndication fees.
On this call today, you kind of mentioned this is kind of evolving topics thoughts something that set in stone.
Now that now that teekay volumes are ramping compared to a year ago.
Curious if you have any updated thoughts.
Our views are those fees or does that framework you laid out a year ago.
That's a good framework for us to assume.
As you think about the next few years in feeds from from Deepak.
Yes, so the framework that we laid out is still holding true to our plan and the subscription fees network fees syndication fees and the discounts for a quick pay are all there. So it is it is playing out pretty close exactly how we had modeled and when you look at the new.
Clients that we're bringing onboard we are using that framework.
We as we work with our existing clients when they add different services that we have to offer we are using that framework. So it is lining up exactly where we anticipated it to be and youll see more of that revenue come to fruition in 2023, as we had planned out.
That's exactly right and in that light.
This quarter for example.
Yes.
There was a revenue drop at <unk> now a contributing factor to that is the overall market is soft but another contributing factor is.
In addition to everything we've talked about for the largest.
Credit worthy freight brokers some of them want to use our balance sheet to extend their days to pay you in other words theyre going to pay a carrier on day 30.
But collect.
We would pay the carrier on their behalf, but they would not pay us the day 60, and you saw some of that in this quarter brokers, who we have done that for who are long term valuable clients, who appreciated that service, but because of the slowing market and because of capital injections into their business didn't necessarily need that service and so on.
Along the journey, there will be plug and play.
That's what we that's the value proposition when you insert yourself into the supply chain.
And you are a bank and you have access to the ability to deliver financing solutions invisibly at the point of sale to whomever needs, whether it's a PE or a payee.
Your ability to monetize the same transaction and to deliver value on the same transaction goes both ways.
So.
We think it works very much like we said I mean, if you think about just the specific invoice and just the wide disparity of what the revenue we generate on a specific invoice might be if we're just doing audits.
On an invoice it might be 10 2030 40.
If however, we're facilitating a quick pay on that same invoice.
On the balance sheet.
<unk>, our freight broker clients.
The value to try and pay more might be closer to $10 and so youre looking at aggregate numbers and where you're distilling it down to some media number but understand that underneath that there is a wide disparity based upon what people need us to do do you need us to audit do you need us to pay.
Do you want us to create the network transaction and do you need our balance sheet or do you need us to facilitate the quick pay to sit on your balance sheet. We're good with any of those because we know at scale.
We have a certain fixed cost to do what we do to make sure the invoices real to maintain the integrations, we need on both sides of the network.
And so the more things you ask us to do we are glad to do them because.
The incremental profitability.
It was up substantially so we've laid it out for you. The best we can do you just need to know that different constituents use our network differently, just like I think different constituents use the visa network for different things.
Core of at the core of the transaction is using structured data to have absolute visibility between a pay or in a pay about what's due and to whom it's due and getting out of the business of making educated guesses there will always be the need for that the factoring industry is going to continue it's going to persist and it'll probably.
We continue to grow not just because of what <unk> is doing for it but because we know there are always going to be transactions that don't flow through try and pay not every pay or is going to be on the network as hard as we may try to do that.
No.
I think what the guidance we've given you you can depend on.
Don't Miss the fact that the longer we go the more value. There is on the same transaction as people become more accustomed to the set of tools, we give them.
For how they can accelerate the payment how they can recognize the payment how they can create supply chain finance opportunities for themselves. If they are on the payoff side of the transaction.
All of that comes together in the ether.
Of this overall revenue per invoice and as we go we'll continue to give you disclosure on what we're seeing but what we're currently seeing is the ability to monetize an individual invoice continues to go up because there's more value we can deliver back to the market on that individual invoice.
Yeah, Okay I appreciate that Eric.
Thanks for the commentary.
And then I guess on <unk> going back to the expense discussion.
I appreciate the kind of commentary that you've already given us for the puts and takes for expense growth for next year.
I. Appreciate there are there are some fixed cost in the tpa model, but it seems like there are some variable costs through sales commissions and I assume those sales commissions are still ramping as you bring on more tier one but at some point it feels like there's going to be some relief there and there could be an inflection.
Color on when that inflection could be as far as the sales commission through the <unk> line.
So Matt the way, we have structured our sales commissions as we are front loading that so as we bring on tier one youll see that commission hit the expense lines in the first 12 to 18 months of the life of that account and then it goes in.
And so as we keep bringing on new new tier ones tier twos. You know every every broker counts and is meaningful to the networks you will see those commissions happen, but for the existing clients. It will start to fall off you won't see any reoccurring expenses to that effect.
Melissa is exactly exactly right, Matt I mean, I think think about it in two dimensions.
At some point it won't be Q4 of 2024.
But at some point in the year or two thereafter, we will have touched.
Not brokers, who control 90% of all freight okay. There is a long tail of 8000, 9000 freight brokers, who control 10% of all freight, but the top 1000 control, 90% and you can.
You can know that all of them know our name, we probably bought dinner for most of them.
And so that day is coming when you've touched the majority of that network and it is not it's not 10 years out in the future right, it's three or four years in the future.
I hope you see commissions beyond that is in our growth in the shipper market.
We have fortune 100 companies, who use us to pay their carriers.
We believe that that $250 billion shipper market is not just ancillary to the payments network, but the other side of it and so if we see commission shift from largely the brokerage community. The shipper community. Then then we win because that just drives network market.
Penetration. So we'll we'll do our best to explain to you Hey. This commission is tied to these brokers and look in the first half of next year Youre going to see commissions go up.
And I'm celebrating that because to date, we haven't lost a customer. This is an incredibly sticky value proposition and you have to invest to get there had I known when we started how much we were going to have to invest to get here.
Probably would have cost a little but now that we're in it and we're seeing it and we're winning.
Those are dollars I'm happy to spend because you have got a go live on the end of it.
And you have a customer who has a longer there with you the more value you create.
Yes, okay. Thanks for that Eric.
And then just lastly.
Shareholder letter you disclosed the credit loss in the third quarter and it sounds like that losses from the liquid credit portfolio.
As you guys are aware that investors are hyper focused on credit quality and the banking industry any color you can give us as far as the industry or the borrower may be and it would be interesting.
To us as far as potential credit weakness.
That was the $2 $7 million provision was related to a single borrower.
<unk> had issued debt about six weeks before.
Cutting their guidance in half and.
Firing their CEO . So there were some from the various things going on at that at the borrower they caught us and a lot of other institutional lenders off guard.
As a result of that did a pretty deep dive into the rest of that liquid credit portfolio, that's about $225 million in exposure across 40 different Pablo doors.
And there is nothing else in that portfolio that gives us pause that we may have issues like we did with this particular, one we really do view it as a one off situation. The team that manages that that portfolio for us. Its a four person team that's been with us for about three years and has brought a ton of value to the organization.
If you recall during the early Covid period in the spring of 2000, and we were able to leverage that team to invest in.
Hundreds of millions of dollars of securities and loans.
Just fire sale prices.
Accrued value to our shareholders pretty quickly.
We've been very happy with what that team has done for US we continue to like the flexibility and the opportunistic nature.
Can we.
We can deploy in that in that business. So.
Answer your question.
No we don't see any broader credit concerns that were a result of that we do really feel like it was an isolated event.
Sure.
Matt exactly what Brad said.
Our loan to go.
Underwritten by.
Two of the largest banks in.
In the World to go Bad and 60 days I mean that is a one off event like that's not we were out there taking undue risk that was in this instance, the management team was able to convince some very large investors and institutions to issue debt on their behalf.
Look we have a $4 $3 billion loan book Theres going to be things that surprised you. This is not systemic this is ed.
And isolate event I'm sure, there's going to be litigation against the underwriters of this but if I look at that whole portfolio or our entire portfolio.
I mean, you see this.
Got to be one of the few banks in your coverage universe, whose loan portfolio has shrunk.
Over the last three years and that's not because we don't see lending opportunities and not because we don't know how to learn.
We're being very intentional in what we do and so we can be intentional and we can be right 99% of the time. This is the 1% where we thought we knew all the facts. So did a lot of other people smarter than us we didn't we get it we will move on but.
I just like to add yes, we took a reserve here, but we're a long way from thinking that we would necessarily take a loss here theres a lot of information that's yet to come forward on this and there's a lot of strength of the company. That's behind this deal as well so I think that.
This is definitely an anomaly. This is not a loss. This was a reserve for the purpose of being conservative right now and we'll work through the situation.
Exactly.
Okay. Thanks for the clarification guys appreciate your help with that.
Got it.
Thank you Matt there are no further questions on this line at this time well now move over to the phone line for further Q&A. Thank you.
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Yeah.
We'll take our first question from Joe <unk> with Raymond James. Please go ahead.
Good morning.
Apologize for not being on video and put my thanks on yet.
But thank you for taking my questions.
So, but we get it.
With Schneider now fully integrated with audit capabilities.
How large of a contribution do you expect them to have and boosting the level of number the number of conforming transactions.
Okay. Good question. So Snyder is a very large organization with multiple divisions and so what I wanted to make sure that we're very clear about is that Schneider has been added to the payments network for one portion of their logistics division and what we see that happen in every implementation.
That we do where we start in one section and begin to grow that throughout the enterprise.
So in terms of Snyder's total volume you won't see a 100% of that be conforming out of the gate, but as we continue to add that functionality in those features for the rest of their divisions, you'll see it start to grow.
Got it.
And.
I was hoping to get a better understanding of <unk> capacity to onboard additional clients.
Based on your comments from earlier it sounds like it's going to take a year to bring on that $15 billion in annualized payment volume you outlined last quarter and so in order to reach your 75 billion target by year end 'twenty four.
Apply a pretty meaningful volume ramp in <unk> 'twenty three and beyond can you help me better understand how youll be able to accelerate the onboarding process.
Yeah, what I would say is that we have a team ready and waiting to onboard all of the brokers and so as we build our pipeline will have the smaller tier two tier three brokers that come into the network. We are actively onboarding them, each and every day our team.
<unk> has deployed all over the country working with customers to get that process done.
What we're saying on the tier ones those are more lumpy and youre going to see those happen in the first half second half of next year, it's not a matter of where we have to onboard all at once there will be continuous on boarding throughout the year. It's just those larger ones tend to add 3 billion $4 billion 5 billion.
All at once when they come on to the network and so.
The team is actively deployed we have the capacity to add more brokers to the network.
But what we have to understand is that the capacity of our customers also has to be kept in mind. So we have that we can only work as fast as they are available to do so and so we stack up all of our implementations to ensure that our team is fully deployed and busy all the time, but also account for.
When our large tier ones are ready to go we have the team available to to jump right on it listen our conversations it seems like a lot more of the conversation is around the clients' ability to handle the integration not ours. So yes, you're absolutely right.
Just what Melissa has done such a great job of laying the foundation of and again you see this in the expense ramp it's not we don't integrate them one at a time, it's a multi front war. So it's not like Oh. This one has to go than this one and this one there are multiple teams of systems engineers working.
Alongside the client so it may be in a given week multiple ones go live or multiple divisions of a tier one go live I don't think of it as linear like it's a thread of multiple work streams happening at the same time, which is why there had to be so much investment that Melissa let us through and the team we built to get here.
So we can't tell you exactly when that wave will crest. All we can tell you is tremendous.
A tremendous amount of work has been done to prepare us for it and we expect to start harvesting the fruit of some of that work in 2023, and really I think in the first half.
Great.
Excuse me I appreciate it.
And then kind of going back to the expenses it looks like <unk> expenses declined a little bit in the quarter.
What drove that.
The primary thing that drove that and we didn't call those out in the letter, but there was about $1 million two in expenses in the second quarter that were borne by the.
<unk> organization that would be have been more quickly borne by the banks. So we unwound that.
Third quarter, so that accounts for the drop that you saw in Q3.
I appreciate it.
And.
I know, you've previously guided to TBC being able to generate $240 million of revenue in 2022.
Wondering if you might be able to provide an update on that outlook and then as well discuss your ability to purchase more invoice prices to offset potential decline in spot rate.
Im just trying to understand the process and purchasing more invoices.
To help support TBC.
Yes, I'll take that one so there is no material change in our revenue.
Forecast.
So that's unchanged and we're on track.
In terms of growing the number of invoices we purchase.
As it relates to the strategy, where you want to grow and this was outlined in our in our letter we serve all of the segments that there are interesting differences between those segments. So as you saw on the letter we have 8000 clients to pay us less than $1000 a month in revenue.
They generate fewer invoices per client revenues just very low.
We've been very successful going upstream and we're one of only a few transportation factors, who can even do that and going to the larger fleets. The medium size fleets discussing the value proposition that is just the difference in factor and Youre also talking about how they finance their trucks, how they fuel their trucks, how they ensure their trucks and integrating all of that into a platform that's <unk>.
It is.
And digitally back and makes sense with the backing of a bank. This is just a competitive advantage and we've had great headway with that larger fleet. That's what's explaining I think when you look at our data we have headwind average invoice prices are down our client count took it yet, but if you look at the at the total number of invoices being purchased.
Going up that's indicative of winning of that larger fleet segment. So that's the strategy and the revenue per client and that larger segment is 10 X. What we have in the small segment. So that's the game that is how we win.
Okay I appreciate it and sorry for jumping around here. So one more question, so I'm going to sneak in kind of going back to the M&A discussion.
I guess, how many potential acquisition targets are out there that you think check all the boxes for you guys.
Okay.
Yes.
Good question.
So if we're if.
If we think about.
Been specific about the shipper market as an area of interest for the reasons I laid out.
There are five freight audit and pay providers that are of size, where an investor and one of them intelligent audit, which is having a great year and we're very proud of what they're doing.
So theres not 100 that matter.
It's somewhat consolidated.
The other places you might invest.
Is and if you think about all the technology companies that have been formed for to do virtual wallets and payments and all this freight tech as long as it didn't post slowed because we don't do preload, we don't do on boats, that's what our clients do.
Our view is when the trailer is drop in the <unk>.
Proof of delivery is signed that's when we take over.
So what does that include well that includes audit payment and then how does the carrier spin the payment there is a.
Virtual wallet, whether it's bank accounts, there's things we're working on organically and there are players out there.
That could complement that and so those would be another opportunity set.
But I think if you were to consolidate all of it people who try to compete with what we're doing in the network. The people who have a customer experience for the carrier on the back end. So the people who provide legacy freight audit and pay services. If you looked at that whole universe youre talking about <unk>.
And we're not going to do 10 deals we might do zero deals.
But it's not a huge universe of opportunities and we want to pick our spots things that we can't build ourselves or haven't built ourselves. That's great. A lot of it is being built there is stuff that we're working on in triumph business capital.
Take the customer experience for all carriers and make it incredibly intuitive as Jeff said.
<unk> changed the dynamics well.
We kind of think we should deliver that to the market rather than go buy something that's not as good.
So.
It's less attending.
And the 11th name is our one is our own stock right, which is a pretty easy M&A discussion, because we know where the skeletons R&R closet, everybody does right there you'll read our 10-K and so that's just that's just the valuation exercise of is this the appropriate time to step in meaningfully to.
To start buying shares back from people, who are thinking short term it may be.
Great. Thank you for taking my questions.
Okay.
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There are no further questions on the phone lines, we can head back to the studio now.
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<unk>.
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