Q3 2022 Usio Inc Earnings Call
[music].
Good afternoon, and welcome to the <unk> earnings Conference call for the third quarter ended September 30th 2022.
All participants will be in listen only mode.
After today's presentation there'll be an opportunity to ask questions.
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A replay will be available shortly after the end of the call through November 23rd 2000, and fine too.
I would now like to turn the conference over to Paul Manly Senior Vice President Investor Relations. Please go ahead.
Thank you my name is Paul mentally and I'm Senior Vice President of Investor Relations at UCL <unk>.
Joined in August of this year and I'm very excited to be a part of this great Senior management team. Thank you for everyone and thank you everyone for joining our call today and welcome to <unk> third quarter fiscal 2022 conference call.
The earnings release, which we issued today after the market closed is available on our website at <unk> Dot com under the Investor Relations tab.
On this call today are Louis Hoch, our president and CEO , Tom Jewell Senior Vice President and Chief Financial Officer, Greg Carter Executive Vice President of payments and acceptance and Houston Frost Senior Vice President of prepaid services management will provide prepared remarks, then we will have a question and.
<unk> session with our covering analysts.
I'd like to take a moment to remind you that certain statements made during the call today constitute forward looking statements made pursuant to the safe Harbor provisions of the private Securities Litigation Act of 1995 as amended.
Such forward looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties are described in our earnings press release and in our filings with the SEC.
Forward looking statements made today are as of date of this call and we do not undertake any obligation to update the forward looking statements.
Now with all that I will turn the call over to Lewis.
Yeah.
Thank you Paul and welcome everyone.
I am pleased to report another great quarter for Ucs, our ninth consecutive quarter of year over year revenue growth.
Our highest card processing quarter in the history of the company and our best ever quarter for output solutions.
More importantly, it was a quarter in which we recalibrated the organization, adding very large and exciting new clients continuing to add to our already robust pipeline and expanding our growth opportunities through both existing and new products and services.
As anticipated consolidated volumes were down due to the exit from the crypto currency market.
While there were no material direct associated costs.
This business was a significant contributor to our performance.
In the year ago quarter and to a lesser extent the second quarter of this year as well.
Pleased however that this that we grew the business in Q3, which illustrates the strength of.
Of our strategy to diversify our businesses.
In the markets, we serve and the payment channels that we offer.
And while the bottom line was down sequentially more importantly, we managed to significantly reduce our cash burn and ended the quarter with a cash position that was relatively unchanged from three months ago.
Now with all of those efforts wound down we have absorbed the attendant inefficiencies they caused in our operations and bottom line.
We are focused on accelerating growth profitability and cash flow.
We are confident we will start to take hold immediately in the fourth quarter.
In particular, our ACG business, which is most directly involved in the crypto.
Which was most directly involved in the crypto currency market is quickly on the rebuild continuing a trend we saw last quarter growth in our high price and high margin return checks remained on a steep trajectory.
Returns were the highest in the company's history and the third quarter.
And we have already processed more returns.
And then year to date.
Our year to date than we process through the <unk>.
Throughout the entirety of 2021.
So while overall AC H volumes may have been down revenues were not nearly impacted to the same degree because the mix of the quarter as well as continued improvements in revenues generated on the transactions such as pin less debit.
The underlying fundamentals of ACTH business are strong and in addition to the better return check where the revenues we expect to see growth.
And both are non bank consumer and Fintech lending customers, which typically increase and a slowing economy.
There are similar transitions happen.
It happening and prepaid business first many of our older incentive programs are winding down, including New York City, where there is an estimated $14 million of unused balances on the cards outstanding and.
With over $18 million on all of our programs.
Overtime. These balances are returned to the partner.
We like New York City, but in the process as a.
Program manager.
We're entitled to our share of those balances as income.
But all of those balances will be recognized as revenue when spoiled.
In September we started to recognize revenue from spoilage and breakage in the fourth quarter and extending into next year.
We expect to recognize and collect even more.
In addition, we're extremely excited about.
Our reoccurring revenue base prepaid card relationship with movie pass.
This program.
We were awarded as one of only two prepaid card processors that have the unique capability to perform external authorizations, allowing movie pass to fund prepaid cards. The moment a customer redeems credits for movie within a movie pass ecosystem, which allows for.
Greater funding controlling spend management.
Under the agreement, we will be charging a load fee when money is deposit or on the card as well as receiving interchange fees. When the card is used at movie theaters.
Movie pass signed up over 700000 users in its first week of launching it.
Beta program.
Yeah.
Which is evidence of the strength of their offerings and their brand.
Movie pass has alerted us that they are hoping to have.
100000 cards lives by the ended the year eventually we will be issuing cards to every customer on their entire platform. So when this program ramps, sometimes next year, we expect to see prepaid generated significant volumes and fees.
So we are confident that we will see renewed growth and even better profitability in our prepaid business.
Output solutions had an outstanding quarter since joining the ACO with communicated about having added more sales and marketing resources and focusing on both new customers and cross selling to the use of <unk> customer base.
The continued growth of output solutions indicates this has been a winning formula.
And things are only about to get better.
We recently initiated a new relationship with one of the largest counties in the country where.
Where we are printing and distributing notices for fines for parking tickets speeding tickets court filings and related items. In addition for the estimated of processed approximately one third of those were recipients anticipated to satisfy their obligations obligation digitally will be processing those.
Payments and statistically it appears that the county has the mail there notices several times before receiving paint.
Payment, which makes us even more attractive opportunity for output solutions.
In and of itself. This is an outstanding win.
But from a bigger and long term perspective. This is a classic example of our ability to consolidate consolidate integrated solutions and products into a single ecosystem that is displaced.
The multiple vendors that the county had been previously working with.
Finally, it was another strong quarter for our card business, where payback led the way by being up 20, 21%.
Over the same quarter in two.
2021.
And we had our best quarter in both volume and transaction process in the history of the company all of which led.
Did the quarter's revenue growth.
Included in the Big integrated solutions win for the large county, we expect to see meaningful meaningful growth in volumes and revenue and card so away from this new relationship.
Meanwhile, the pipeline remains robust penetration of the existing ISP merchant basis.
On the rise and volumes continue to grow from the constant increase in the number of merchants on the platform as well as the incremental growth of the merchants themselves.
As I mentioned earlier, despite the loss for the quarter, we burned minimal cash and we remain we retain a strong balance sheet with virtually no debt.
With the spoilage and breakage expected next quarter, the majority of which is cash straight to the bottom line, we expect a financial position to strengthen which will continue to fill the fuel the investment in our growth initiatives. All in all it was another solid quarter as we continue to leverage.
Unique multichannel strategy to capitalize on the rapid expansion of the electronic payments market.
We're still on pace to achieve our anticipated 12% to 18% fiscal 2022 revenue growth rate and rebuilt the momentum into which we believe will be a very exciting 2023, especially with the visibility there.
The Ria core reoccurring spoilage has provided us.
Finally, I want to express my condolences to the family of our cofounder and longtime chairman Michael Wong who passed on September 7th.
Michael was my mentor confidant friends and business partner for nearly 30 years.
<unk> employees. So Michael is a teacher in a leader that they loved respect and admire.
He will be greatly missed by everyone.
We had the great fortune to work with them.
And now I'd like to turn the call over to Houston Frost.
Thank you Louis and thank you to everyone participating in our call. This afternoon.
Prepaid had a solid third quarter, although we admittedly had a have a difficult comparison to the third quarter of 2021, when the New York City vaccine incentive program began ramping up.
It is important to note that the revenue generated in Q3 of this year comes from several several smaller card programs with recurring loads as opposed to being dominated by just a couple of large one time cash disbursement initiatives.
I'll also point out the prepaid revenue is up 44% over the first nine months of the year.
Given the expectation Louis mentioned regarding the recognition of significant spoilage and breakage revenue in the fourth quarter. This will once again be a record year for prepaid and more importantly, a year in which we strengthened our product set diversify our client base and expand our opportunities to grow in new large markets.
Processing metrics for the quarter reflect the evolving nature of our business.
As we previously mentioned, while the large New York City contract has wound down a substantial portion of the revenue from this program is just beginning to be recognized as account balances become dormant.
And and inactivity fees are assessed.
This fee related revenues should also lead to improved gross margins and cash flow, which means we should see record prepaid results in the fourth quarter of this year and through the first half of 2023 with.
With these benefits to both our top and bottom line extending throughout 2023.
Programs like New York City represent a tremendous opportunity and we have competed and we will continue to compete for similar programs. Some that are 10 times the size and then y C.
But the reality is most of our revenue today is being generated by longer term programs that tend to be smaller in nature.
We believe focusing on a more diversified group of programs that bring in recurring revenue is the right strategy.
While we will certainly not avoid these larger opportunities with a more limited lifespan, we recognize the difficulty these programs impose on our operations as well as the volatility they create a processing metrics and financial results.
On the disbursement side City States and counties are continuing to increase their direct cash assistance programs. We are a leader in this market currently managing almost two dozen direct cash assistance related card programs.
Many have an initial term of between two and three years with the potential to be extended much longer than that.
Recently, we've added programs in Chicago, Chicago Resilient communities D C. The office of state Superintendent of education.
Cook County promised guaranteed income pilot the city of Irvine stand, Illinois, and the bridge project.
The British product is as amazing as an interesting illustration. It is new York city's first guaranteed income program designed to support low income mothers in New York City during the first.
Days of their children's lives by providing them with consistent unconditional cash on a biweekly basis.
We're building up a solid base of these longer term disbursement programs and as the bridge project and other previously described programs illustrate there is a large market for our technology as these entities increasingly embrace the many advantages of <unk>.
Dispersing funds using payment cards.
We are also continuing to see volume increases with our corporate expense solution and are adding new clients such as sort pack HR works.
Eddie and Q ledger.
Health care is a large new market opportunity for the corporate card solution, where our virtual card offers an elegant alternative to some of them are antiquated systems used to process company sponsored rebates today.
We expect to see continued growth in corporate expense related purchase volumes in 2023, which generates 60% to 65% more interchange revenue per dollar transacted than our consumer programs.
And the consumer incentive and gift category, we have well known names such as <unk>, such as mobile money and movie pass that are beginning to ramp up card orders.
And particular movie pass is an exciting opportunity as Louis previously mentioned, while the dollar amounts of any one transaction may be limited there is potential for widespread adoption and heavy usage and this program has multiple revenue streams. So that our revenue per transaction dollar maybe the best across our.
Our our organization.
Because of the structure of the new movie pass, there's no credit risk to UCL and we're certainly excited to see this program get underway.
Mobile money has similar characteristics in their case, they came to us because of our ability to provision a consumer gift card product.
This illustrates our ability to offer a range of services, where some of our competitors are focused only on disbursement or corporate expense with UC, how clients can choose from a variety of card program types.
New Ledger and movie pass are illustrated.
Our illustrative of the appeal of our unique remote authorization technology, along with class wallet and on vocal.
These partners products require unique solutions for authorizing transactions and we're one of only a few processors currently offering this type of solution.
I also want to mention our consumer choice solution, which has only recently been rolled out with.
We signed new clients like Genius Avenue next SPD solution and our pipeline is building quickly.
We plan to continue to make improvements and enhancements to the consumer choice solution as we monitor feedback from consumers as well as consider the needs and requests of our clients.
Our ability to provide a solution that provides payouts through a variety of payment channels is an attractive value proposition that is getting a lot of attention.
It's not all about the technology bells, and whistles and a competitive market. Our strategy follows the community banking approach relationships matter.
We strengthened our relationships through execution operational excellence and our willingness to undertake complicated and unique integrations that many larger firms refuse.
We understand and recognize that the lumpiness of large programs like New York city's can skew a pattern of nice smooth straight line growth, but even without these volumes prepaid revenues are substantially greater than pre pandemic levels.
Whether it is by virtue of new evergreen programs or the occasional larger opportunity. We believe that we are building a strong organization that will generate attractive growth and returns that are key to creating value over the long term.
With that I'll conclude my remarks, and turn the call over to Greg Carter Executive Vice President of payment acceptance.
Thank you Houston and good afternoon, everyone. The card business continues to perform exceptionally well fueled once again by payback growth this quarter.
APAC revenue was up 14% in the third quarter as volumes were up over 20% year over year.
This led to a 5% quarter over quarter growth in total card revenue as total dollars process were a quarterly record of $332 million with $2 8 million transactions process also a record.
Relative to the quarter a year ago total dollars processed were up 7%.
I am pleased to say that payback through October 2022 has already exceeded the total dollars processed in all of 2021 every.
Every dollar process through the end of the year as incremental growth.
Additionally card operations were profitable for the fifth consecutive quarter a trend we see continuing.
APAC remains our growth engine in the third quarter, we continued to sign new ISP agreements, while maintaining a robust pipeline.
<unk>, we've been hard at work refining and Iterating, our product set growing our features and functionalities.
Now offer an even greater breadth of options to accept payment whether that's a traditional card present card not present, our QR code implementation or hosted payment pages.
<unk> channel our hosted payment pages has been getting a lot of traction as of late.
We could literally go to any merchant and with zero integration, we can stand up a customized website within 12 hours that can accept payments on a mobile or web based environment.
It's an effective way from new customers to use an experienced UCL without incurring any development expense and it's proven to be an effective bridge whenever isd's take longer than anticipated to integrate.
We are also starting to sign deals that are touching multiple segments of our business.
The large west Coast County program is a great example of the benefit of having a combined output in our payment strategy.
This entity was previously using two separate vendors for their print and payment needs, but with our multichannel capabilities UCL can provide both solutions.
Zipkin, so traffic tickets fines property tax notices and the like will have an option to make an electronic payment through our Paypal platform.
As you heard from Louis This program has made a very fast start out of the gate. It's a classic example of our investment thesis is playing out well output is so strategic to the U C O payment ecosystem.
There are numerous other opportunities for multiple product sales to other Isps.
Several are looking at our prepaid card solution in each of these cases the sum of the parts is greater than each of these individual businesses.
Our efforts not only uncover payback opportunities, but generate leads across the entire UC organization.
One of the new solutions, we mentioned last quarter consumer choice is getting an extremely warm reception.
We're discussing consumer choice with one of our large Isps in the legal industry for their claims in a state management funds disbursement needs right now they are sending out physical checks consumer.
Consumer choice gives the recipients of these funds with flexibility to receive their money via a CH virtual or physical Mastercard were pushed to debit.
Saves, our ISP partner money and simplifies recordkeeping, while offering their customers the choice in how they ultimately want to receive funds.
And we are integrating with new partners and are in the final stages of a new sponsor bank relationship that will enable us to target larger completely new markets, allowing us to board margins that we haven't been able to in the past this will increase our market flexibility and autonomy and create new growth opportunities as we penetrate new markets.
These are just a couple of examples of why we continue to broaden our products and solutions to respond to emerging market trends.
Since our value proposition as a one stop shop and increase our revenue streams.
The number of integrations and on boarded on boarded merchants was lighter in the third quarter than we've experienced recently how's.
However, we do see lighter traffic and lead volume in summer months, but the pipeline and what we have pending is still very rich during.
During this time, we've shored up some other areas of the business specifically the back office I can't say or speak highly enough about our back office and how it's evolved not only in the customer service front and then also how being proactive in generating revenue that heretofore did not exist because of their constant outreach. It is our human touch.
And now we can actually point to real revenue being generated from these efforts I have no doubt the number of merchants on our system today is directly proportionate to the back office improvement or daily proactive outreach to our ASC customers to increase not only their revenue share with the number of merchants processing on our platform.
Since it's football season, now I'll use a football analogy.
I'd say in the third quarter, we had no turnovers, we didn't fumble and we didn't commit any penalties.
But we have great field position, we expect the scoring to start literally next quarter I'm incredibly optimistic for the fourth quarter and beyond.
Sitting idle we continue to be very active in the marketplace through face to face meeting industry conferences and trade shows and that's improving our pipeline.
But with the number of Isps being added the number of merchants being boarded and the number of processing merchants are improving month over month, we have tangible evidence that we continued to generate healthy growth.
Even though our revenue improved both sequentially and year over year in the third quarter. They are clearly not indicative of the underlying strength of our business and for sure. They are not a predictor of what's going what we're going to do in the next quarter and well into 2023.
We remain on pace to meet our commitment to use shows full year 2022 revenue growth objective and to remain at the vanguard of our growth over the long term 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 financial results in greater detail.
Thanks, Greg and welcome everyone. Thanks, again for joining our call today and for your interest in Ucs Im going to conclude today's prepared remarks with a brief review of our third quarter financial results before opening the call to questions.
Revenues for the quarter ended September 32022 were $16 4 million, an increase of 4% compared to the same period last year.
Output solutions was our fastest growing business in the quarter with revenues up 32% from the same quarter last year, driven driven by organic growth and cross selling into the installed customer base revenues for the for card in the quarter were 5% once again, primarily attributable to the strength of our payback.
<unk> revenues in <unk> and complimentary services were down from a year ago. When we generated significant revenues due to our participation in processing transactions for the crypto currency clients. We serve prepaid revenues were down primarily as a result, and wind down to the card issuance and transaction processing fee.
<unk> of our Covid relief programs. However, there is still approximately $18 million of total revenue to be recognized with our share of that amount being <unk>.
Approximately $500000 in Q3, and which is expected to more than double in the fourth quarter.
Gross profit in the quarter were $3 1 million down about $100000 on a sequential basis from the second quarter of this year, while gross margins were at 19, 1% marginally lower than in the second quarter. This year, we have seen margins trending in this range as a result of it.
Shifts in product mix due to a reduction in the proportion of revenues generated in our highest margin business.
Rebound in AC H and the recognition of prepaid spoilage and break it should provide an immediate lift in margins in terms of our agreement with some COVID-19 relief programs.
Virtually reduce our share of the small agent breakage from its current levels to a much lower percentage percentage once about half of the $18 million has been recognized which will impact margins from that point forward.
For the quarter total selling.
General and administrative expenses were $3 7 million down sequentially from $3 8 million in the second quarter of this year and up 30% from the year ago quarter.
Expenses have extensively stabilized at current levels and represents a strengthening of our various operations in line with the growth experienced over the past several years continued investment in our growth initiatives as well as the impact of a tight labor market.
Reflecting continued focus on the bottom line reduce we reduce both operating and adjusted EBITDA loss on a sequential basis from the second quarter, we reported a $1 $7 million operating loss for the quarter compared to a $1 $9 million loss in the second quarter with the curve.
Period loss, primarily due to the narrower gross margins and increased operating expenses, we've reduced the adjusted EBITDA loss in the quarter to $551000 down from approximately 600000 in the second quarter as confirmed last quarter. We continue to expect positive adjusted EBITDA in Q.
Four.
For the quarter, we reported a GAAP net loss of $1 8 million or <unk> <unk> per share.
The company remains in strong financial position cash and cash equivalents as of September 32022 totaled $4 6 million down about 500000 to over the past three months of which over $325000 represents repurchases under our stock buyback plan in the quarter.
Given the increase in slowing it spoilage and breakage anticipated to be collected in the fourth quarter, we feel comfortable with our financial position as we look forward to up to upcoming quarters looking quickly at our year to date results revenues were $50 7 million up 14% from the same period last year with growth.
Across all of our businesses gross profits were $9 9 million and gross margins were 19, 5%.
For the first nine months of 2022, both below year ago levels due to this year's previously noted mixed shift.
The adjusted EBITDA loss for the first nine months of 2022 was $1 4 million and we reported a net loss for the first nine months of the year of $5 3 million.
Or <unk> 26 per share.
Looking at non-GAAP non-GAAP , adjusted operating cash flow, which excludes non operational changes in merchant reserve funds prepaid card load assets customer deposits and net operating lease assets and liabilities over the first three quarters of the year was a use of $1 $1 million.
<unk> is on track for another year of double digit growth and record revenues. Despite our separation from our crypto currency account that represented approximately 8% of prior year revenues, we have exciting new programs currently coming onboard are developing capabilities that are <unk>.
Wanted to emergent emerging market needs and have the financial resources to continue to invest in these initiatives. We are very optimistic about the future.
That concludes our prepared remarks for today, we would now like to open the call for any questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Rama <unk>.
Jon Hickman with Ladenburg. Please go ahead.
Hi.
Couple of questions first of all what is the cash.
Firm or free cash flow for Q3 versus Q2.
Okay.
So it's $1 million.
Well its $1 million.
Close.
Okay, I'm, sorry, I'm confused.
Yeah.
Free cash flow for Q3 was what.
Okay. So youre looking at the <unk>.
Cash flow statement operating cash flows is that what you know I just want you to tell I guess.
<unk> said that the cash that there was <unk>.
The improvement in.
Cash flow from Q2 to Q3.
And I was wondering what that improvement was.
Youre talking about the burn rate right.
Yes.
He also.
Run rate was up 500000.
Versus $2 million.
Okay. Okay. Thank you.
And then my next question has to do with the County program.
And the discussion about that program.
As I mentioned of the use of cards along with paint.
Payments and printing.
Or did I misunderstand.
Yes.
Its hard business, which is credit card so we print.
The notices.
There'll be multiple nervousness credit before.
Where somebody initiate the payment either a credit card debit card or ACH payment.
L a county.
County isn't here, we're talking about yes, but he is L. A county is also a prepaid and there are also a sign of prepay, but that's not what was being discussed.
In that County went live in late September .
Okay and then one last question you said that you recognized 500000 of spoilage and Q3.
That's correct yes.
Okay. Thank you.
Again, if you would like to ask a question. Please press Star then one.
Our next question comes from.
Ronald Nelson a private Investor. Please go ahead.
Hello, Louis I would like to know if the fusion errors will ever get involved with.
Credit unions, and the processing and handling support they need.
So we have a lot of credit unions that we print and mail for and produce these statements.
Okay. It seems that.
Some of the nonbank people that lean on their credit unions could.
Could use.
<unk> help because you have been involved with.
Nonprofit.
People since 1998 as well as bank people. So if you could give me.
A glimpse of a chance that we might.
Get more involvement with credit unions I'd appreciate it.
Hang up and listen to what you say thank you.
Yes, well credit is.
Part of our business and print and mail and E statements.
And we're always looking to expand that market and.
Hopefully youll see us do more with them we're friendly.
Checks their credit unions for disbursements.
So hopefully youll see us do even more than that in the <unk>.
<unk>.
Again, if you would like to ask a question.
Please press Star then one.
Our next question comes from Michael Diana with Maxim Group. Please go ahead.
Okay. Thank you.
Lewis the movie pass opportunities sounds.
Very interesting I think you said.
About a 100000 7000.
Going to go live in the fourth quarter, and then probably the rest next year is as so should that come in sort of.
Throughout next year or front end loaded or for what.
Let me pay launched in beta mode in three cities.
And that will continue throughout the end of the year. They are hoping to have 100000 cards.
<unk>.
By the end of the year.
Those are reoccurring revenue as a reoccurring revenue program.
Very exciting for us to have very strong brands.
And then they'll go into full general availability sometime next year, they haven't communicated to us when there'll be we're hoping it's going to be first quarter.
They have signed they have pre sign ups for 775000 people already.
Because of the strength of their brands each one of those people are allowed to invite another 10 people. So.
They're going to have a huge customer base.
When they were previously live with one of our competitors that was their largest prepaid.
Program.
So we have.
We're really excited about this program.
And the brand is super powerful so.
Again as reoccurring revenue.
And as to why that there should be a lot of transactions and it should be a very big contributor to us next year.
Okay, great. Thank you very much.
Thank you.
Okay.
Again, if you would like to ask a question. Please press Star then one.
This concludes the question and answer session.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.