Q3 2025 Usio Inc Earnings Call
Speaker #1: Hello and welcome to the UCO third quarter fiscal 2025 earnings conference call. All participants will be in a listen-only mode. After today's presentation, there'll be an opportunity to ask questions.
Speaker #1: 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.
Speaker #2: Thank you, operator. Good afternoon and thank you for joining UCO's third quarter fiscal 2025 conference call. The earnings release, which we wish we issued today after the market closed, is available on our website at uco.com under the investor relations tab.
Speaker #2: On this call with me today are Louis Hoch, our chairman and CEO, and Greg Carter, executive vice president, payment acceptance, and our chief revenue officer.
Speaker #2: Michael White, our Chief Accounting Officer; Jerry Uffner, Head of Card Issuing; and Houston Frost, our Chief Product Officer, will be available during the question-and-answer session later.
Speaker #2: Please 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, and as more fully discussed in our press release and in our filings with the SEC.
Speaker #2: I'd like to start off today's call with some highlights from this afternoon's release. Q3 was a solid quarter and in line with our commitment to deliver stronger second half of the year.
Speaker #2: These results were achieved on the strength of strong across-the-board processing volumes, with seven quarterly processing volume records set in the period, including a record quarterly overall transaction volume of 16.2 million, up 8% year over year.
Speaker #2: This resulted in a 1.2 million dollar sequential increase in revenues impressively led by ACH, which was up strongly from the second quarter and for the third consecutive quarter, up 30% from a year ago quarter.
Speaker #2: While total revenues were relatively unchanged from the year ago quarter, are strong sequential momentum positions UCO for a return to top line growth in the fourth quarter and for the full year 2025.
Speaker #2: As discussed last quarter, our total revenues this period were again adversely impacted primarily by continued weakness in card issuing, along with a decline in interest income.
Speaker #2: We expect this to mark the final quarter of difficult card issuing comparisons with performance improving going forward. One of the key themes this quarter is most of our new and total revenue are recurring in nature.
Speaker #2: This is an important milestone and one you'll hear reflected throughout our discussion today. Margins in the quarter improved year over year driven by strong growth of our high margin, ACH business, as well as further efficiency and productivity enhancements.
Speaker #2: While salary adjustments and other costs led to an increase in SG&A, we do expect overhead to remain stable for the balance of the year.
Speaker #2: Our third quarter was another quarter of positive profits and cash flow. Adjusted EBITDA in the quarter was 368,000 dollars down just incrementally on a sequential basis from 500,000 dollars in the second quarter and also down from a year ago.
Speaker #2: Operating cash flow for the quarter was 1.4 million dollars, reflecting the continued strength of our business. Our cash was up over 200,000 dollars over the past three months to over 7.8 million dollars at quarter end.
Speaker #2: We anticipate continued cash growth through the remainder of fiscal 25, positioning us to invest both in organic expansion and potentially into opportunistic strategic acquisitions.
Speaker #2: In the quarter, we used approximately 60,000 dollars for share repurchases bringing our total year-to-date repurchases to 750,000 dollars or just over 500,000 shares. The third quarter represented an important inflection point for UCO with record processing and transaction volumes, solid sequential recurring revenue growth, and sustained profitability and cash flow.
Speaker #2: In addition, we completed or made significant progress on a number of our larger new implementations, while continuing to build a growing pipeline of attractive opportunities.
Speaker #2: From an organizational standpoint, technology upgrades, new product launches, and ongoing productivity gains are positioning UCO for what we believe will be a new period of accelerated growth.
Speaker #2: At this time, I'd like to call, and turn the call over to Greg Carter.
Speaker #3: Thank you, Paul, and good afternoon everyone. September was a record quarter for card as we reported an all-time quarterly record of transactions processed in the second highest volume of card dollars processed in any quarter.
Speaker #3: Led by our continued focus on the payback business, our credit card segment continues to grow, with dollars processed up 12% and transactions processed up 75% from a year ago.
Speaker #3: While card revenues were correspondingly up both sequentially and on a year-over-year basis, key payback revenues were up 32%, continuing their double-digit year-over-year growth as a result of net new client implementations.
Speaker #3: They are currently 16 new ISVs in various stages of implementation. And from last quarter's implementations, I'm pleased to report that the largest of these new enterprise merchants has now been implemented and has been processing with us over the past few months.
Speaker #3: That's really the theme of the third quarter. This virtuous cycle of a strong pipeline leading to implementations that then lead to volume and ultimately reoccurring revenue.
Speaker #3: We are starting to see the fruits of that now and into the fourth quarter, setting up for a really solid 2026. We've also been seeing existing customers adding new business.
Speaker #3: For example, we have a long-time ISV that just added a new innovative prepaid program. The current customer base continues to evolve and grow through new programs and new merchant acquisitions.
Speaker #3: All along referenceability has always been a key. Our capability and our unique products have attracted several referral entities that are sending larger opportunities our way as they've been impressed with our performance in the market.
Speaker #3: So, in addition to our sales team, we are cultivating referral agents that can send us meaningful opportunities. This is paying dividends for us as, for instance, the large account recently implemented was from a referral entity.
Speaker #3: I should also mention that this account is not an ISV using our payback. So, our traditional processing capabilities remain another growth channel. Another unique application where we've been able to win business is because of our willingness to provide customization that many of our competitors won't.
Speaker #3: One of these programs is our new filtered spin client. There are over 1,000 merchants that have already gone through underwriting and are on the program.
Speaker #3: So, when it goes live, it could be meaningful. This is a new concept in the market we are helping to pioneer with the expectation that we could become a market leader.
Speaker #3: You may have seen Houston Frost on LinkedIn recently demonstrating one of our new wearables. This is just one of the many wearables we are exploring and developing, whether that be wristbands, tap-to-pay, or similar products.
Speaker #3: It's another area on which to keep an eye. Finally, let me provide a quick update on our UCO One initiative. Recall that UCO One is being implemented as a means to capture a greater share of our customers' electronic payment and printing volume.
Speaker #3: As of today, UCO is essentially integrated into one unified entity. We've rolled out a platform for boarding of all of our customers on a centralized site.
Speaker #3: In addition, most of our sales team has been trained up and has a strong functional knowledge and understanding of all of our products. An example of how this is working is a salesperson that was originally selling legacy card processing recently sold a large print and mail program.
Speaker #3: I expect the productivity of UCO One to accelerate throughout 2026. Now, I'd like to turn the call over to.
Speaker #3: Louis. And welcome,
Speaker #2: everyone. Let me begin by saying that I'm thrilled with the results of our operating metrics for the third quarter. We set seven quarterly processing records including most transactions processed through all of our payment channels, record electronic check transactions, check dollars and return checks processed as well.
Speaker #2: Including penless debit transactions, dollars processed, and credit card transactions, this momentum continued in the month of October, where we set an all-time monthly processing record for ACH for both transactions processed and returned checks processed.
Speaker #2: I'm very excited about what I'm seeing with our ACH business, which also happens to be our highest margin business unit. What is different today is that the volume is primarily from reoccurring businesses.
Speaker #2: But when you look at our numbers, today's primarily reoccurring revenue is being compared to a year-ago quarter that included a number of one-time non-reoccurring items.
Speaker #2: That's distorting our underlying progress and the real UCO story. Stripping away the influence of those one-time items provides a better picture of the fundamental growth and the strength of our core operations.
Speaker #2: And those seven processing records provide a great measure of our progress. I would also note that revenues were up on a sequential basis in all of our business lines, putting us on pace to meet our commitment to shareholders to deliver a better second half compared to the first half of this year.
Speaker #2: This is a great start to the second half. Which we will expect lead UCO to growing once again this year. The message is clear as a processor, our jobs to grow volumes to take advantage of the operating leverage that we have created.
Speaker #2: We want more transactions, and we want more volume. And we're doing it while maintaining our pricing discipline. And most importantly, as processing statistics illustrate, it is increasingly reoccurring in nature.
Speaker #2: Looking more closely at our businesses, ACH was a standout once again. Revenues were up 30% for the third quarter, led by the previously mentioned record volume.
Speaker #2: In particular, this was the eighth consecutive quarter of year-over-year growth in electronic check transaction volume, and dollars processed. ACH benefited from both new deals and the growth of our existing customers.
Speaker #2: At the same time, our penless debit offering also set all-time records for both transactions and dollars processed, with growth over the same period in 2024 of 96% for transactions processed and 87% for dollars processed.
Speaker #2: Both metrics were primarily driven by the growth in the mortgage servicing industry and the fintech industry. Penless debit is a great solution for applications where credit cards cannot be accepted.
Speaker #2: So, mortgage servicers absolutely love it. And we are one of the few processors that offers this market of a penless solution. Turning to card issuing, we generated sequential volume growth in the third quarter with total dollars loaded exceeding 75 million revenue was also up slightly on a sequential basis, and card issuing profitability continues to improve.
Speaker #2: As we mentioned last quarter, this year, we are comping against a very strong year-ago quarter that had significant revenues from very large account as some from residual New York City revenues.
Speaker #2: Going forward, the comps should begin to normalize as the large account revenues were concentrated primarily in the second and third quarters of 2024. Once again, you will be able to clearly see the fundamental growth of its core business in the card issuing revenues.
Speaker #2: Because of card issuing's outstanding reputation, and its various governmental and charitable organizational markets, we're receiving calls from various card program opportunities for financial aid and assistance that is related to the government shutdown.
Speaker #2: We're hopeful that we are benefit from these financial assistance programs in the fourth quarter. Of this year. Card issuing continues to penetrate the healthcare market, where early next year we expect one of our signature accounts to double their volume.
Speaker #2: And another new healthcare customer is also planning to launch their pilot with us this month. From product standpoint, we are improving our consumer choice user interface, and we've implemented and are in a beta rollout with our initial payroll card customers while our merchant-funded offers look like it will launch early next year.
Speaker #2: Card issuing also has an impressive pipeline of numerous large and small new opportunities. While it would be premature to forecast any of these opportunities into our future results, especially the larger opportunities, based upon the ongoing dialogue and the activity levels which we are engaged, we are hopeful we should be able to land some of this business in 2026.
Speaker #2: Consequently, we believe that sequential growth generated in the third quarter is the beginning of a rebound that we expect to continue and to accelerate over the coming year.
Speaker #2: Output solutions had a solid quarter looking beyond the year-ago one-time items. Output also generated sequential revenue growth. For instance, electronic-only documents delivered were up to 20 million pieces in the quarter.
Speaker #2: Up about 500,000 from a year ago. Indicative of the fundamental core growth. And like card issuing, outputs profitability metrics continue to improve aided by the shift to more electronic document fulfillment.
Speaker #2: While on a per-unit basis, we charge less to process an electronic document than a paper document, processing electronic documents is more profitable. So, the transition to electronic documents may reduce revenues while improving earnings.
Speaker #2: Output also had a solid quarter of closing new business. With 12 new agreements signed, including municipalities, utilities, tax offices, and others, a majority of which are electronic document processing, that promised reoccurring revenue.
Speaker #2: There are also set to print and mail several million voter registration cards in the fourth quarter of this year. Output is also replacing some of their older equipment with some brand new state-of-the-art printing technology.
Speaker #2: Not only this will expand our capacity, but will enable a more competitive offering for large high-growth markets like healthcare, and taxation. So, we're building momentum across the organization, focused on reoccurring revenue.
Speaker #2: In the near term, we will remain profitable with another quarter of both positive adjusted EBITDA and cash flow. The balance sheet is strong. And we continue to use this strength to build shareholder value.
Speaker #2: Having now used over 750,000 dollars to repurchase shares so far this year. And with our positive cash flow, we can fund our growth and share repurchases while maintaining sufficient dry powder to capitalize on favorable acquisition market should an appropriate opportunity arise.
Speaker #2: Behind the curtain, we continue to invest in the organization. Not only to strengthen our current infrastructure, but also to develop innovative new solutions that will leverage our technology and large and growing markets.
Speaker #2: I'm extremely encouraged by the conversations I'm having with all of our teams. Everyone is working hard. And we are seeing the results in growing volumes.
Speaker #2: This is very motivating. There is a great sense that we're on the verge of a potential inflection point that should follow the momentum that we've been building.
Speaker #2: We appreciate your support as we continue to build value for our shareholders. And with that, I'd like to turn to call back to the operator and conduct our question and answer session.
Speaker #2: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad.
Speaker #2: If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster.
Speaker #2: Our first question comes from Scott Buck of HC Wainwright. Please go
Speaker #2: ahead. Hi, good
Speaker #3: afternoon, guys. Thank you for taking my questions. Louis, I'm curious, you guys describe a pretty what sounds like a pretty strong pipeline of future opportunities.
Speaker #3: Are you seeing any change in sales cycles or anything along those lines that could potentially move some of those opportunities forward or maybe push them further out versus what you've seen
Speaker #3: historically? Well, the pipeline is
Speaker #4: strong. If Greg wants to add anything to my comments, he's welcome to. But the sales process is very exciting for us, but we actually are focusing more on implementations.
Speaker #4: And trying to get these customers that we've already sold implemented. Which represent quite a bit of volume. So, that's our focus is getting merchants to implement faster.
Speaker #4: But the sales pipeline for every division is rich. Greg, do you want to add?
Speaker #4: anything? No.
Speaker #5: Just to echo that comment. Excuse me.
Speaker #3: Okay. It's helpful. And it's a bit of a follow-up. Do you guys have levers in place where you can kind of push the pace of adoption?
Speaker #3: Or is that really outside of your
Speaker #3: control? The implementations
Speaker #4: are out of our control. If we can figure that out, that would be the secret sauce. To accelerating us very
Speaker #4: fast. Okay. Each business is each business unit is nuanced in that the implementation or the adoption is slightly different. So, there's really no one size fits all.
Speaker #4: But the UCL One initiative is doing a lot better as far as standardizing kind of the input of information within UCL, but then it's all dependent on those customers to integrate at their will.
Speaker #3: I see. Okay. That's helpful. And Louis, hopefully I didn't miss it. I have a couple of calls going on at once here. But the federal government shutdown during the fourth quarter, has that the impacts of that leak down into any of the state or local governments that you work with or would that potentially have any impact on the business during the fourth quarter?
Speaker #4: Well, when SNAP payments got suspended, we received numerous calls from cities and counties looking to bridge those payments on their own. And it was very heartening to hear that some of these new cities that we've never talked before and counties knew about us and reached out to us.
Speaker #4: Some of those programs they're going to go forward, but they're not going to go forward on the basis that it could have been. Because it looks like we're going to be out of the government shutdown.
Speaker #3: Yeah.
Speaker #4: Some were pushed out. A good bit are on hold pending the movement of the federal government and opening the government back up.
Speaker #3: Okay. But nice to know that you're the first call they make. Great. And then last thing, in terms of cash levels, you mentioned M&A.
Speaker #3: Could you just kind of run through what kind of criteria you would be looking for in a potential
Speaker #3: transaction? Yeah.
Speaker #4: We'd go through this. It had this question quite a bit. We're very strict. On what we acquire. And our criteria is three-fold. One, it's got to provide some type of synergy.
Speaker #4: The synergy could come through people, industry, or technologies. We need to be able to buy it right. And the third thing is we need to whatever we're buying shouldn't have any issues a problem that we think we can fix.
Speaker #4: Because we don't want to take our focus off of growing the company or our organic growth that we have in
Speaker #4: sight. Got it.
Speaker #3: Okay. And then I guess if I could squeeze just one last thing in more of a housekeeping question. Which remaining on the current repurchase
Speaker #5: Michael, do you know? authorization?
Speaker #4: Yes, sir.
Speaker #4: This is Michael. We renewed that at the beginning of the year. So, there's still another just over $3 million remaining on that current plan.
Speaker #3: Okay. Perfect. Well, I appreciate the time, guys. Congrats on the progress and looking forward to seeing what you do the rest of the second
Speaker #3: half. Thank
Speaker #4: Thank you.
Speaker #3: you. Once
Speaker #2: again, if you have a question, please press star, then one. Our next question comes from John Hickman of Lattenberg. Please go ahead. Pardon me.
Speaker #2: Just one moment. John, your line is live.
Speaker #6: Okay. Hey, Louis, can you hear me? I can hear
Speaker #4: Yeah. Hello.
Speaker #6: you. Okay. I'd like to I'd like to circle back on this. Your comments on the recurring revenue went particularly in the ACH business. What's changed that it's largely recurring
Speaker #6: now? Well, all of our business
Speaker #4: has been margin recurring. It's just when we compare it to last year, we had quite a few one-time events. That
Speaker #6: Could you.
Speaker #6: Such That we earned revenue.
Speaker #6: as?
Speaker #4: Yeah. We
Speaker #4: printed a large
Speaker #4: bankruptcy. Okay. Distribution. A large card order. Plastic, which we usually don't mark up much at all.
Speaker #6: Okay. Okay. So, going forward, you don't think you're going to get I guess you can't ever count out the future, but if you don't get those one-time events, then the rest of the revenues largely coming from the same customers?
Speaker #6: And that should continue? Is that what I'm supposed to get out of
Speaker #6: that? No.
Speaker #4: What you're supposed to get out of it is our comp from last year had one-time events. We may have one-time events in the future.
Speaker #4: In fact, we've already become public. At the end of this year, we're going to print the voter registration cards, a large portion of them for Texas.
Speaker #4: While that's a reoccurring account, it only occurs every two years. So, that will be another example that will occur in the fourth quarter of this year.
Speaker #4: We'll continue to get card orders but probably not at the scale that we got in Q3 of last year. So, it's just a comp issue.
Speaker #4: But you can count on the revenue that we had this quarter was almost completely reoccurring. They're from existing customers that will continue to be customers.
Speaker #4: We'll continue to bring on new customers that have reoccurring business as well. To add to
Speaker #4: them. Okay.
Speaker #6: And then I have a question for Houston. So, I think you said credit card processing volumes were up 75% year over year? Is that
Speaker #6: accurate? I think you want
Speaker #4: that's for Greg. Yeah. I think that's
Speaker #4: for John, right? Okay.
Speaker #6: Okay. Sorry. Yeah. So.
Speaker #4: For transactions processing,
Speaker #4: yes.
Speaker #6: Transactions processed.
Speaker #6: So, can you I guess for it's confusing the transaction volumes were up that much and revenues were up like 5%.
Speaker #4: So, I'll take that. John, let me explain this to you when we met with you in California. The transactions for credit cards that when we report the operating metrics include penless debit.
Speaker #4: The revenue associated with penless debit goes into ACH and complimentary services because penless is alternative to ACH. And at some point, we believe that it will diminish our ACH traffic just like FedNow and the clearing house when they get their act together and allow us to do debits.
Speaker #4: So, the metrics operating metrics were up. Transaction-wise, and also remember on credit cards, transactions don't really mean anything to us. It's the dollars processed.
Speaker #4: That's how we earn revenue.
Speaker #6: Okay. Okay. Thank you. Appreciate the
Speaker #6: reminder. All
Speaker #4: All right.
Speaker #4: Thanks. This concludes our