Usio, Inc.
Q4 2020 Earnings Call Transcript

Published: 30 Mar 2021

[Operator:]

Good day, and welcome to Usio Earnings Conference Call for the Fourth Quarter Ended December 31, 2020. Participants of this call are advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. A replay will be available shortly after the end of the call through April 12, 2021. I'd like now to turn the conference over to Joe Hassett, Investor Relations. Please go ahead.

[Joseph Hassett:]

Thanks, Matt, and thank you everyone for participating today. Welcome to Usio's fourth quarter and full year 2020 financial results conference call. The earnings release, which Usio issued yesterday after market close is available on the company's Investor Relations website at usio.com/investors under News.

[Louis Hoch:]

Thank you, Joe, and welcome, everyone. I'm pleased to report all-time record revenues for both the fourth quarter and the full year of 2020. Revenues were up very strong 27% in the fourth quarter, leading to positive cash flow. We also record a positive net income and earnings per share in the quarter. Revenues for the year were a record $32 million, a 14% increase over fiscal 2020 with double-digit growth achieved, despite a dip in the second quarter due to COVID.

[Houston Frost:]

Thank you, Louis, and welcome, everyone. It was both an outstanding quarter and year in which we basically doubled the size of our prepaid business. The strong growth experience over the first three quarters of fiscal 2020 carried over into the fourth quarter. Card load volumes were up 95% and transaction volumes were up an even stronger 143% in the fourth quarter as compared to the same quarter last year. For the year, load volumes were up 162% and transactions up 97%. As a result, prepaid revenues nearly doubled to $1 million in the fourth quarter and more than doubled to $3.2 million for the year, an increase of 107%. The primary driver of growth remains our support of community civic and social nonprofits as well as municipalities and other governmental organizations providing financial assistance to communities in need. While the great majority of the volume was initially related to pandemic relief, we have already begun to work on several non-pandemic related programs, for example, guaranteed income programs. The organizations we have worked with over the past 12 months have recognized that our prepaid solutions provide the control and flexibility they need to improve the process of dispersing funds, as well as visibility into how funds are being utilized. In the process, Usio has become a leader in the field with over 100 organizations across the United States integrating our card issuing technology, that are programs. I also want to mention that Mastercard has been a fantastic partner this year, and helping us build new relationships and supporting these new card programs. Our partnership has continued to evolve where Mastercard is further integrating us into their philanthropic city possible network, an accelerator for America program.

[Tom Jewell:]

Thanks, Houston, and welcome, everyone. Thanks for joining our call today and your interest in Usio. I will provide a brief review of our financial results before turning the call over to Greg. Looking at the fourth quarter, revenues for the fourth quarter ended December 31, 2020 increased 27% to $9.4 million compared to the same period last year. Continuing the strong trends seen throughout 2020, revenues were up 98% in our prepaid business. And in our card business revenues were up also led by PayFac, which was up 22% in the quarter. ACH revenues continue to recover from the second quarter trough and were up sequentially for the second consecutive quarter, in part due to growth in our PINLess debit and account inquiry product lines. During the fourth quarter, we acquired IMS and approximately one month of the revenues are included in our results for the quarter. Organic growth for the quarter was 11%, excluding the Output Solutions revenues.

[Greg Carter:]

Thank you, Tom and welcome, everyone. It was another record quarter and a record year for the Card segment, in fact all-time record highs. Card dollars process were up 17% and up sequentially from 15% growth in the third quarter, while transactions processed nearly doubled at 97%, also a strong sequential growth trend from 81% in the third quarter. For the year, dollars process were up 14% and transactions process were up 58%. With growth in the second half of the year above, this clearly illustrates that growth is accelerating and we are headed into 2021 on a strong trajectory. Revenues were ahead 12% for the year and 3% in the quarter. Just as importantly, we signed contracts with dozens of new ISVs substantially strengthened our overall infrastructure and implemented new processes and procedures to improve productivity and efficiencies. The net result is a significant improvement in our conversion rate. We are now more confident than ever that the ISV is choosing Usio's PayFac, we'll quickly move from signing to processing. So, the Card segment continues to make great progress establishing a solid foundation to support what we expect to be exponential growth in 2021. Now let me provide an update on some commitments I've been sharing with you since joining Usio. First, I committed to bring more discipline, structure, process and accountability to our operations. And I firmly believe the addition of the dedicated implementation team established earlier this year has been a driving force behind the improvement in our conversion rates. We continue to invest in that team on a strategic basis and we're earning an attractive return on the investment. An example of our continuous innovation is our new customer scorecards. These allow us to go to ISVs and present them KPIs related to their processing business, such as how many merchants have boarded, how much volume has been processed and the revenue earned by the ISV. Believe me, the last KPI gets their attention. This provides a consolidated dashboard that allows the ISVs to gain insight on their program, and this has been well received by our ISVs. I believe we have benefited from the repetition of a more disciplined process. We are getting more intelligent about how ISVs operate, and each implementation is better than the previous one and we're becoming much more efficient for getting these done in a timely manner. Basically, we're getting smarter. Second, I committed to reorganizing our sales operation into a more vertically focused subject matter expert structure. This too is paying dividends. Most predominantly as a result in the legal software vertical, two of the three largest legal software ISVs are Usio clients. And over the past 2 months, we have strengthened our sales team by adding new enterprise focus professionals. The success of our new sales strategy is also a function of a significant improvement in our marketing efficiency, which just seems to get better day by day, and are committed to mining our existing customers, which we believe are processing billions of dollars in electronic payments outside of Usio. Once again, the implementation team has been doing a fantastic job with this opportunity. One example is a name which may sound familiar to you, practice suite. Once a somewhat dormant Usio ISV, Practice Suite is now boarding new merchants every week. I expect by the end of the year, they will have meaningful volume on our platform. So, the implementation is pulling double duty, getting our new ISVs on board and processing while also going back to existing relationships and helping them convert their merchants and increase activations. So headed into the new year, we are feeling very good and are highly confident that the first quarter will be another record quarter for the Card segment. Specifically, we expect solid performance from our bankruptcy software ISVs. They are actively boarding merchants and we are seeing volume ramp on our system. Having recently shown our scorecard to one of these ISVs where they have assigned a dedicated Program Manager, I can tell you they're highly motivated to accelerate the merchant adoption process. This also provides credibility within the legal software space, where we are pursuing additional opportunities. In the first quarter of 2021, we've already contracted eight new ISVs. Given the heightened productivity of our implementation team and after the typical coding process, we expect to add meaningful volume on top of our existing business. And it now appears that we could possibly have onboard and implemented our first 100 million per year processing volume clients. They are on pace for a $9 million month, which we think could eventually go higher. As I mentioned, Practice Suite is also scaling. In fact, we're starting to see merchants boarding at a steady pace for many of the previously dormant ISVs. Another new growth vertical is the franchise model. We recently contracted with a roofing franchise that has mandated all new franchisees implement the Usio PayFac technology to process electronic payments. Another well-established franchise that is expanding their brand into the coffee space is doing the same. The franchise market represents an exciting new growth opportunity. Finally, as the pandemic subsides, we believe we will start to see volume increase from the ISVs with businesses were most directly affected. Again, this growth that is essentially in our system that we believe will manifest over the coming year. For instance, our ISV that serves the parking space is starting to bounce back as more and more people take to the road. New ISVs, new merchant sign on to add ISVs are two growth channels. There's a third growth channel and the organic growth of the individual merchants. So, we really have three ways to grow and each we feel highly confident about results in 2021. Before concluding, I want to echo some of what Louis mentioned, and that we are not fully out of the COVID-19 woods yet. We certainly feel good about things that we control, COVID-19 continues to have lingering effects at certain ISVs, although we are optimistic these will shortly resolve. Last quarter, I concluded with some thoughts about the long last service. From the investment we are making in our organization, I hope you can appreciate that we value service to our customers very highly and not just in card but throughout Usio as a whole. We will never forget that. That concludes our prepared remarks for today. So, we would like to now open the call for questions.

[Operator:]

Our first question will come from Barry Sine with Spartan Capital Securities. Please go ahead.

[Barry Sine:]

Hey, good morning, gentlemen.

[Louis Hoch:]

Good morning, Barry.

[Barry Sine:]

My first question is on the credit card business, obviously, your largest product category and a couple of aspects to my question. First of all, we've seen a divergence between growth in transaction volume and card dollars in the last couple of quarters. Wondering what's going on there? And within credit card, if I look back to the results, you just reported for 2020, what were the COVID related pluses in credit card? And what were the negative impacts, and how can we read that as we bounce back in 2021?

[Louis Hoch:]

So, the first part of your question, I'll answer, Barry. This is Louis. We brought on a card customer on PINLess debit platform, that their fees are less than $5. So, it's a lot of transactions, lower dollar volumes, but we get our normal margins on that traffic. So that's what kind of skewed given us more transactions with less average ticket. And then the second part of the question?

[Joseph Hassett:]

Could you repeat the second part? Is that the COVID related nature?

[Barry Sine:]

Yes, I want to look at just credit card revenue, and better understand the results just reported for the last four quarters, what were the negative impacts that drove the credit card revenue? And were there any positives like income transfer programs in credit cards, specifically. I know, prepaid, but credit cards specifically.

[Louis Hoch:]

Yes, so COVID definitely had an impact on one portfolio that we have in the second quarter, and that was our veterinarians, our dentists. But with respect to some of those ISVs that were generating traffic prior to COVID, a lot of those cease to exist entirely. But because of COVID and the desire for contactless payments, some of our ISP is actually improved. So, it's -- we're -- that portfolio that I referenced earlier is back to normal levels. But I don't think there's any negative effects as we sit today.

[Barry Sine:]

Okay. And you also mentioned crypto, which is kind of the magic word in the stock market these days. If you could elaborate a little bit more what you're doing? It sounds like you're processing U.S dollar payments going to crypto exchanges. Currently, we can kind of just discuss that and then what's the outlook for potentially having Usio except cryptocurrencies, for payments to merchants on your platforms?

[Louis Hoch:]

So as to your first question is, we're having a lot of volume with crypto, and it obviously mirrors the excitement that surrounds crypto industry right now. What we're doing for exchange is when you set up an account, you need to fund your account. And so, you're pulling money from your checking account, or your savings account. As you add more money to invest in crypto, you create more ACH transactions for us. When it comes time to withdraw money, you're creating more ACH transactions for us. You will also see us implement prepaid cards to tie in with exchanges. And so that that segment, ACH and prepaid cards are a great fit for AC -- crypto exchanges. And another great fit is PINLess debit and you'll see us do some of that as well with the crypto exchanges. As accepting crypto was payments for our merchants as definitely on the roadmap, and we have the partner to do it with well-integrated into our gateway, and it'll become another payment option. When we do that, we won't accept any risks on the crypto fluctuations. We'll have a partner do that for us. But we will allow payments to be made with Bitcoin and other prevalent coins.

[Barry Sine:]

Okay. My last question, if you don't mind is ran ACH. So, you gave some pretty bold comments about the outlook for that segment after a rough year in 2020. There is a disclosure in your 10-K I believe that you lost a pretty significant customer in the first quarter. So, despite the loss of that customer, you still expect very strong growth in ACH especially in the early part of the year.

[Louis Hoch:]

Yes, we did lose a customer that represented about 15% of last year's volume. About one and a little more than 1% of our revenue last year that was totally offset by our gains from organic growth and customers in Q1. Q1 will be up substantially great quarter for ACH. And it winds up being our best quarter in ACH in the history of the company.

[Barry Sine:]

Okay, that's great. Thank you very much.

[Louis Hoch:]

Thank you, Barry. Our next question will come from Gary Prestopino with Barrington Research. Please go ahead.

[Gary Prestopino:]

Hey, good morning, everyone. A couple of questions here. The 26% gross margin that you got in the quarter significant increase sequentially as well as year-over-year. Can we talk about it? Was that driven by IMS or Output Solutions? Or was that driven by resurgence of the ACH business? And then what does that portend for 2021 in terms of your gross margin?

[Louis Hoch:]

It definitely was driven by IMS, and partially by ACH, but and where we're projecting, low 20s for the year.

[Gary Prestopino:]

Okay, so low 20s. All right. And it sounds like from the way you're talking about the momentum going into 2021. That we should see sequentially if things stay the same. The results get stronger as we go through the year, year-over-year and on a sequential basis. I mean, at one time, you had kind of committed that you would do over a million dollars of adjusted EBITDA in 2021. And I know you're -- you didn't mention giving any guidance, but just trying to understand is how you were looking at the year this year in terms of the overall growth aspects for the company.

[Louis Hoch:]

We're definitely on a nice growth pace right now and in Q1 is amazing. Then we'll have the guidance we're given as it is more for the year. And we believe that we will achieve $50 million in revenue and be cashflow positive for the year.

[Gary Prestopino:]

Okay. All right. That's good. And then given that, Greg, you're saying that the PayFac business is starting to reach an inflection point. Overall, though, when does that get to the point where, and I know you don't break this out, but the business that you're doing and the revenues you're generating there can fund the growth and the investments that you're making versus having that come out of the whole corporate pie.

[Greg Carter:]

Yes, I think we're seeing a dramatic improvement in first quarter of this year with the ISV that I referenced earlier. There are several still in queue and in various stages of rollout activation. So that inflection point I believe, is, is not only now, but this quarter and into the balance of 2021. So, to the extent it isn't in the big bucket, or using kind of your words, I think we'll be able to really see that the results of PayFac quarter and into the remainder of 2021. And just to be clear, with that ISV that you say is processing $100 million worth of dollar volume of transaction, that would be 3% to 4% of gross take off that $100 million by the ISV. And then, whatever percentage you guys would get, generating the volume that you do offer that 3% to 4% of that $100 million, is that correct?

[Louis Hoch:]

That's a little high for this year ISV, because majority of their traffic is actually debit cards.

[Gary Prestopino:]

Okay.

[Tom Jewell:]

So, in the 2% range, the margin -- our margins are similar, though. We are splitting revenue with the ISV obviously.

[Gary Prestopino:]

Yes, I just want to clarify that. Thank you.

[Tom Jewell:]

Yes.

[Operator:]

Our next question will come from Brian Kinstlinger with Alliance Global Partners. Please go ahead.

[Brian Kinstlinger:]

Great, thanks so much. A follow-up on the gross margin, which was impressive in the fourth quarter. You said, you expect just now today, the question that you'd be in about low 20s in 2021, which indicates down from the fourth quarter, but IMS only contributed one month. So, what are the factors to drive gross margin lower, given IMS will generate full quarter -- full quarters or revenue and ACH is surging with Voyager.

[Louis Hoch:]

So, ACH is a big pick up for margins. But, 60% plus for ACH business, that's definitely going to help. Our card business PayFac is growing pretty quickly. And that is a lower margin business and that's going to pull it down, and then print and mail is a lower margin business. But in the last year, we had some lucrative deals come through IMS with higher margin. So, their normal part of their business is very similar to PayFac where it's 15% gross margins. And so -- hopefully ….

[Robert Rakowski:]

And so I tell if that clarifies it, for sure. And then I looked at the balance sheet and see prepaid card load obligations has gone from $19 million in the second quarter is $7 million at the end of December. How do we think about this in terms of the potential to generate revenue? Is it a small percentage of that $7 million assuming, obviously, the call, card holder uses all those funds? And then if you could comment as well, Houston mentioned that the unevenness in prepaid in early 2021, we assume it'll fall from fourth quarter before it starts to increase again.

[Louis Hoch:]

So how is your . Yes, I'll go and take it. So just so you know on the prepaid load volumes sort of help for customers. That's not dollars loaded on -- currently loaded on card accounts rather those are just funds that are waiting to be loaded. And so you're really just looking at a snapshot in time. It's really hard to take that number and use it in any kind of way to project load volumes. Because it really -- it depends on the time that you're looking at that number and how many dollars are ready to be loaded to cards and the timing that the clients are going to load the cards. So I don't know if that is clear happy to try and clear that up a little bit more, but that doesn't really indicate any kind of total load volumes for the quarter or anything of that nature because it's not our prepaid card balances rather it's just dollars that are being held ready to be loaded the cards. What sort are -- sir, did you provide and maybe I missed it. Did you provide what the actual dollar value on cards is right now because I assume when they're used you get some percentage of that in processing so i guess I'm just trying to understand what the percentage you’ve given, where are you at and then obviously we've got a new COVID relief package, so I expect that's going to benefit. Yes so, we don't report on our total balances right now. We do report on our total card loads because we think that's really the forward-looking indicator, if you will, for revenue. Generally -- there's kind of a wide range, it depends on the type of card the -- those dollars are being loaded to in terms of the revenue will generate from them. But it should be between 3% and 5%, up to 5% even of those load volumes. But then remember that that revenue is recognized over a 24-month period with probably 50% of it being recognized 12 months after the cards are loaded and that's because of cards that have a breakage or inactivity fees and the like. So, we don't pull any of that revenue forward and so a lot of the load volume from 2020 we're now going to see additional revenue from that in the third and fourth quarter and some in the second quarter of 2021. Now we do share that message with our partners and that's a way for them to maximize the efficiency of the dollars they're dispersing, but certainly that will come in to play from the low volume last year, this year. And then can you repeat the second part of the question again.

[Brian Kinstlinger:]

Just we had a COVID relief package I think just we could go Yes, I'm just curious, does that eight given your dispersing funds for relief funds as .

[Louis Hoch:]

Yes. So, really the federal COVID programs while we do see some volume come through on that, that really comes through on our consumer reloadable or GPR kind of our bank alternative products. So, we're not doing dispersing funds from the federal government and we started this time we are really dispersing funds from smaller programs that are supported by nonprofits cities and states that are going to underserved communities and different kinds of community segments. So yes, we will see some load volume just from direct deposits coming in from the federal stimulus and I'm sure some of the stimulus from the federal government that goes to the states will end up in some of these programs that we worked with. But again, sort of hard to do any sort of direct correlation there.

[Brian Kinstlinger:]

Great. Thanks so much guys for your time. thank you, Q - Our next question is a follow-up from Gary Prestopino. Please go ahead.

[Gary Prestopino:]

Hey, louis, can you talk a little bit about what some of the successes, early successes you've gotten from cross selling your payment products with the IMS business or the Output Solutions business.

[Louis Hoch:]

Yes, without naming customer names I can tell you is so Usio legacy processes payments for a lot of municipalities and we also have a lot of health care accounts and they obviously have a lot of regulatory notices and they have statements. And so, we're able to pick up the phone and I think this last quarter flows three great …

[Gary Prestopino:]

Well, yes, we got -- we also have an ISV that works with print mail houses that were actually in proposal stage for right now. So, we've had some success, pretty easy sales to more like, yes, we print stuff give us this price and you can have it. And we do have an ISV that did move their print business to output. So, we've been very successful in selling print. We've also this quarter, we hired two very experienced enterprise sales people to add to Greg's team. They are going to be focused on selling electronic bill presentment and print and that they'll also be able to sell payments obviously but the first thing they're going to lead with is electronic bill presentment and print. And so, you're going to see a lot of that. We're going to be able to grow the print business for sure and we're definitely going to be able to provide payments into this amazing customer base that we acquired which is a whole bunch of utilities, some large credit unions and also a lot of municipalities also including states as well governments. Are you -- is the plan to take the tape back business and kind of white label it for the individual entities that are right now doing Printville that an individual when they go to pay their bill can go directly to the entities website and pay with a credit card, or is it something where you've got to send a bill and it says go to httpusio.com to pay your bill. So the quick answer is we have both solutions, but the ABVP is going to be sold as a service so that through the toolkit they're able to implement the portions that they need so they're able to grab their print statements via pdf to integrate into their customer service platform. They can also do credit cards they can do PINLess debit associated with that statement they can do ACH one-time reoccurring, And so all that's available through our toolkit and as a service and allows the utilities to pick and choose what they need.

[Gary Prestopino:]

Okay. Thank you.

[Louis Hoch:]

You bet. Thank you.

[Operator:]

This concludes our question-and-answer session which also concludes our conference for today. Thank you for attending today's presentation you may now disconnect.