Usio, Inc.
Q4 2015 Earnings Call Transcript

Published: 25 Mar 2016

[Operator:]

Good afternoon, and welcome to the Payment Data Systems fourth quarter 2015 results. [Operator Instructions] I would now like to turn the presentation over to Julie MacMedan, Investor Relations for Payment Data. Please go ahead.

[Julie MacMedan:]

Thank you, Amy, and welcome to all of you who have joined us for today's call to discuss Payment Data Systems fourth quarter 2015 financial results. Our earnings release, which we issued earlier this afternoon is available on our Investor Relations website at paymentdata.com/invest, under Press Releases. I'm here today with Michael Long, Chairman and CEO; Louis Hoch, President and COO; and Habib Yunus, CFO. On today's call, management will provide prepared remarks, and then we will open up the call to your questions as well as answer questions that have been emailed to us by investors. Before we begin, I'd like to remind you that comments on today's call will include forward-looking statements. Forward-looking statements can be identified by the use of such words as estimate, anticipate, expect, believe, intend, may, will, should, seek, approximate or plan or the negative of those words and phrases or similar words and phrases. Forward-looking statements by their nature involve estimates, projections, goals, forecasts and assumptions and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements. These forward-looking statements speak only as of the date of this conference call and should not be relied upon as predictions of future events. Payment Data Systems expressly disclaims any obligation or undertaking to update or revise any forward-looking statements made today to reflect any change in Payment Data Systems expectations with regard thereto or any other changes in events, conditions or circumstances on which any such statement is based, except as required by law. Please refer to our SEC filings and our Investor Relations website for additional information. And with that, I would now like to turn the call over to Michael Long, Chairman and CEO of Payment Data Systems. Michael?

[Michael Long:]

Thank you, Julie. Welcome, everyone, and thank you for joining us on the call today. Over the past year we have had a number of exciting developments at Payment Data Systems, and with our progress and listing on NASDAQ, we decided it was time to begin conducting quarterly conference calls with investors, as a way of adding context and transparency to our financials and to our operations. Following my remarks, Louis Hoch, our President and Chief Operating Officer, will review our technology solutions and growth strategies in more detail; and our CFO, Habib Yunus, will close the call with a review of our financials. Since this is our first conference call as a public company, I would like to provide some background for those of you who may not be familiar with us. Let's start with who Payment Data Systems is today. Simply stated, we are a leading integrated provider of payment solutions. We are organized as two operating entities, Payment Data Systems and FiCentive. It is through these two entities that we operate processing platforms for ACH, credit card and prepaid cards to deliver convenient world-class payment solutions and service to our clients. We have a 17-year history as a company, and during that time we have built longstanding and valuable relationship with premier banking institutions, such as Fifth Third Bank, Sunrise Bank and Wells Fargo. We serve unmet needs in a fast growing market that demands secure, adaptive and convenient payments and prepaid products. And because of the customization and innovation we provide in meeting these needs, we have created a loyal base of customers that Louis will tell you about in a few more minutes. At this point, I'd like to spend a few moments on our two operating entities and review for you the major differences. I'll start first with Payment Data. Payment Data has continued to innovate and grow the technology in its products and service offerings for our merchant processing platform that is used for both ACH and credit cards. As an example, we have a tremendous amount of data that flows through our system, and our plan is to continue to develop products and services based on this data to benefit our customers. Using this data, we launched in October our new eCheck verification product, which helps merchants prevent return checks prior to processing, and therefore reduces the number of returned items. I am proud to report that our focus on innovation and delivery of world-class payments processing technology for our customers drove record results across all key operating metrics in 2015, and for the first time we exceeded the $3 billion in total dollars processed in a year and $14 million for transactions processed in a year. Now for a bit on FiCentive, our prepaid card operations. At the end of 2014, we jump started our prepaid card business with our acquisition of Akimbo. This acquisition provided a number of benefits for us by adding a highly talented technical staff of industry subject matter experts and marketing personnel. We also acquired an innovative cardholder service platform with new and significant prepaid card front-end technology, including mobile applications. In 2015, as part of our overall strategy, we integrated Akimbo's consumer-facing applications with FiCentive's processing platform, which resulted in a highly adaptive and powerful new technology. We now offer a comprehensive and complete end-to-end solution for prepaid and incentive cards that delivers what customers want; speed, mobility and anywhere anytime access. As such, we expect our prepaid and incentive card business to be a significant growth driver for us in the coming future. Now, let's get back to a broader view of the combined operating entities. Given our long-term growth plans and the momentum in our business, we invested significantly, enlisting our company on the NASDAQ stock market in August of last year to increase our visibility and appeal to institutional investors, broaden our shareholder base, provide us with better liquidity, and ultimately contribute to increasing shareholder value. As part of the listing process, we enhanced our governance by adding to the Board two new independent directors, Miguel Chapa and Kirk Taylor. Mr. Chapa brings us 17 years of experience, building successful companies in the entertainment, service and food industries. He has extensive expertise in business, strategic planning and financial analysis. Mr. Taylor, who serves as a Chairman of our Audit Committee is a certified public accountant, and brings us more than 20 years of experience focused on management, accounting and finance. We expect to benefit tremendously from each Board members expertise, as we continue to execute our long-term growth strategy. In summary, this is truly an exciting time to be in the payment space. The rapid growth of ecommerce, online mobile payments and new alternative payment methods are driving significant change in the payments market. Electronic payments including payments made with cards and ACH, now collectively exceed 85% of all non-cash payments. There has been an explosion in mobile payment option, such as Apple Pay and others, as well as chip-based card, EMV, technology initiatives led by Europay, MasterCard and VISA to reduce fraud, which is driving merchants to rapidly adopt contactless point-of-sales terminals or EMV terminals. As never before, merchants need to manage this complexity to thrive, and are looking at payments and payment innovators much more strategically than in the past. Payment providers, such as ourselves, that can innovate and partner with merchants, banks and vendors to help them transition in this dynamic environment will be the winners in this increasingly complex landscape. We combine technology leadership with best-in-class processing and highly innovative products and services, designed to serve the growing needs of our customers. And with that, I would like to introduce Louis Hoch, our President and COO, for a more detailed discussion of our technology leadership and how we meet the needs of our customers. Louis?

[Louis Hoch:]

Thank you, Michael. We are very excited about all the new opportunities for growth in the payment space and how we have positioned our company for leadership. In our view, it has become increasingly hard for new entrants in the payment space to secure the necessary bank sponsorships, which provides a strong barrier to entry and a competitive advantage for us. With that said, the strength of our company lies in our proprietary technology that enables us to provide custom solutions for prepaid card issuance and processing and merchant payment acceptance. For today's call, I want to highlight three solutions we view as competitive advantages for Payment Data

[Habib Yunus:]

Thank you, Louis. As Michael noted, 2015 marked a record year for Payment Data Systems. Our transaction processing results drove revenues to a new high of $14.4 million up about 7.5% from 2014. Our revenues reflected growth in all business lines, ACH, credit card processing and prepaid cards. Our gross margins also improved this year, it went to $5 million or 35% of revenues, which was a 19% increase from $4.2 million or 31% of revenues a year ago. The 330 basis point improvement in gross margin was largely due to the introduction of a higher margin product that I'll discuss in a minute. Now, turning to operating expenses. 2015 marked an investment year for us, as we positioned Payment Data Systems for long-term growth. Our investment focus in 2015 is centered on four areas

[Operator:]

[Operator Instructions] The first question is from Brian Kinstlinger at Maxim Group.

[Brian Kinstlinger:]

Can you talk about how your company is positioned to benefit from the shift to new technology you talked about like chips or Apple Pay? How are you positioning in that market?

[Louis Hoch:]

Well, we just announced that we are the first to implement Apple Pay for prepaid card, and that's important. To do that we had to implement technology that's called tokenization for authorizations. And that generates basically unique card number every time a transaction is processed. That same platform will allow us to implement other mobile wallets, as like Samsung Pay and Android Pay, both of which are on our product development roadmap, neither of which we've committed to a timeframe yet. But we think that contactless payments are important. We have vision that in the near future that, consumers will have the opportunity to decline plastic. In other words, you could register for a card and choose to have it sent directly to your mobile phone. And we're positioning ourselves to be the first to do that as well.

[Brian Kinstlinger:]

And then also, you talked about your new verification product that was launched in October, I think. Can you talk about how much revenue you expect to generate from this product in '16? And then maybe go through how much revenue you generated in '15 from check returns, and how much that business might be down, given that mix shift that you've talked about?

[Louis Hoch:]

We don't break out our numbers by product type, so we're not willing to do that. But we can tell you that we announced our check verification service in September of last year. We created that product based upon new regulatory requirements for lower return rates to help our merchants succeed in that environment. That first month that we implemented it, 33% of our customer base chose to adopt it. So we're seeing some success there and we think that will continue.

[Brian Kinstlinger:]

Last question, I have is, can you talk about what you're doing to raise product awareness for Akimbo?

[Louis Hoch:]

Akimbo, we're doing a little bit through the web, traditional type of web advertising. But we actually see more impact coming from partners that they have a captive card holder base and our customer base that they can leverage the Akimbo platform through. And a good example would be C2Go that had existing card holder base, and they chose to implement the Akimbo card.

[Operator:]

Your next question is from William Gibson at ROTH Capital Partners.

[William Gibson:]

Could you share the breakdown between Payment Data last year and FiCentive?

[Habib Yunus:]

I don't know. This is Habib. As Louis mentioned with Brian, we don't separately state by business line right now or by subsidiaries, we just provide consolidated results.

[William Gibson:]

Which do you expect to grow faster this year?

[Habib Yunus:]

On a percentage growth, we expect the prepaid side to grow explosively. On a dollar side, we expect -- and the merchant side, which we include ACH and credit processing, to be bigger in terms of dollars, just because it's already a bigger piece of the business.

[William Gibson:]

And could you give us, just one other question, a little more color on the potential acquisition candidates or universe, size of business you're looking for, number of candidates, that sort of thing?

[Louis Hoch:]

Well, the interesting thing in our industry is that there's two types of acquisitions that are possible for us. One, which is very probable in our industry is, that there's portfolios of merchant accounts that are available for purchase. Easy way to understand that is like when a bank buys a book of mortgages from another bank and they just start servicing them. So we're looking at portfolios that we can bring on to our network and be transparent to the merchants and then go back and cross-sell into that customer base. We're also looking at strategic acquisitions that are within our industry that could be prepaid card program managers, that could be other payment companies that are operating at more of a sales function than a infrastructure level like us, that we could receive a new product or service that would complement our existing customer base, but more importantly bringing in that base, that product, that we can get some economies of cost. A lot of companies that operate at a sales level, they're working with the company like ours already, and maybe they're paying $0.10 a transaction for it. And once they come into our network, our cost would be around $0.03, so there is some financial synergies as well.

[Operator:]

The next question comes from Gregg Hillman at First Wilshire Securities Management.

[Gregg Hillman:]

Could you talk about the C2Go, which quarter do you think it will become material to your company? How do you think that will cash out?

[Louis Hoch:]

We hope to see some good results from C2Go in the second half of the year. They do have existing cardholder base that we're going to be moving to our cards. And now they have the capital to attack the market second half of the year. And again, we're excited about that relationship.

[Gregg Hillman:]

Can you talk about the order of magnitude for that or you'd rather just be quiet about it for now?

[Louis Hoch:]

Well, other than what we've already said, we think it will double our existing cardholder base of Akimbo. So it made sense for us to make the $200,000 loan to them, which converts into equity later on after they pay the loan, and so it will help you understand maybe a magnitude there, we put up some money, because we were sure of it.

[Gregg Hillman:]

Habib, about this stock-based comp, it was a line item for the December quarter, it looks like $300,000, was that a good run rate going forward for quarter?

[Habib Yunus:]

Let me just check, yes, I think that should be pretty accurate. We actually had stock divested in the end of December 2015, so that amount will go down slightly from the first quarter. And then that will be a pretty consistent run rate, because we didn't issue anything of significance really during 2015. 2015, we just issued a few shares, I mean, relatively, compared to the overall expense to directors and employees. So going forward, yes, I would say, right around that, it was $310,000 in the fourth quarter of '15 and probably right around that or just a little bit less would be our run rate going forward.

[Gregg Hillman:]

And then, Louis, for that precedent last time you did on the Spark Network for serving churches, how important is that? Do you think that would be material or when will that kick in? And what kind of hopes do you have for that in your church business? I mean, will that just replace existing business or is that totally a new business?

[Louis Hoch:]

It's going to be both. The interesting thing about Rock RMS is that it's open source, which really works well with a lot of churches, because they don't have a lot of money to spend. And the technology is just amazing. And so we think they're really well-positioned to capture a large amount of churches. And we're integrated into them, so once a church downloads the software, they're going to instantly see that we're connected. We've already received -- in the last few weeks, we received about five enquiries for to come on to our network and we really like it how they're marketing their product, and again, we like the cost structure for the church. And it fits well with our vision of providing reasonable priced services for charges and charities.

[Gregg Hillman:]

Do you think you could do other partnerships on the order of magnitude of C2Go in the year, other big affiliate marketing type programs for the Akimbo card, or I guess, other services?

[Michael Long:]

Yes, definitely. You'll see us announce some in the future.

[Operator:]

The next question is from [indiscernible].

[Unidentified Analyst:]

Question about the other expenses, the $713,000 in the fourth quarter is roughly $700,000 a quarters, is that the new run rate for those expenses?

[Habib Yunus:]

That's right. Yes. So other expenses -- in the MD&A, we'll kind of break that out in the 10-K, but the majority of it is salaries, and yes, that's probably going to be a pretty consistent number going forward.

[Unidentified Analyst:]

And then you talked about revenue for 2016 during the call, you've said that, in the second half revenues will be up significantly. Can you quantify, is that like over 10% or anyway to get any more color about second half revenues?

[Michael Long:]

We're not publicly announcing any type of projections at this point.

[Unidentified Analyst:]

And as far as acquisitions, can you say like any kind of size of acquisition that you would, don't know, greater than?

[Michael Long:]

I can tell you, we're actively pursuing portfolios. So we're reviewing them currently. So hopefully you'll see us to do one of those this year. As for acquiring the company or strategic acquisition, we're currently not reviewing any, but we're very open-minded to that.

[Operator:]

The next question is from [ph] Ryan Fisher, Private Investor.

[Unidentified Analyst:]

So looks like gross margins recovered in Q4 up to the high 30s, is that a rate that you guys feel like you can maintain in '16? Are we going to see more volatility in gross margins like we did in '15?

[Habib Yunus:]

Well, I think it should be pretty consistent going forward. Part of the reason was, we were talking about the change in the natural rules, and so with the introduction of the eCheck verification service, we're able to recover our margins even with a little bit lower revenue with this higher margin product. So I think we expect margins to stay pretty consistent going forward.

[Unidentified Analyst:]

And then in regards to the Akimbo acquisition, I assume that was not profitable in '15, would that be fair to say?

[Louis Hoch:]

It wasn't. And it turned out to be by design. We decided to invest more into that platform. If we would have left it as is and just dissimilated it, it would have. But we saw a whole bunch of opportunities like including Apple Pay, C2Go that required us to expend a lot of expenses to build the system up even beyond where it was.

[Unidentified Analyst:]

So I assume that the $785,000 for property and equipment on the cash flow statement, would that be going to Akimbo?

[Louis Hoch:]

That's right. The majority of it -- some of it was equipment. We acquired some new hardware, but the majority was internal software development. So that was integration of Akimbo into our platform, as well as some new products, so like the Akimbo Now product, the Apple Pay integration, the Akimbo Gift Card. So we spend a lot of internal resources and money to bring Akimbo into the platform and really get Akimbo ready for some explosive growth going forward.

[Unidentified Analyst:]

So in terms of 2016, do you think Akimbo is still going to lose money or is it going to be breakeven or profitable or you're going to be on that side?

[Louis Hoch:]

I think it will contribute this year.

[Unidentified Analyst:]

And then kind of piggybacking on some of the other questions about the acquisitions, given where the stock price currently is and your cash flow, I mean you guys are trading at basically under 10x cash flow. I mean have you guys given any thoughts on just buying back your own stock instead of taking on a risky acquisition or what's the mentality on that?

[Habib Yunus:]

Well, definitely, it's something that we've considered, something that the Board looks at often and the Board has to decide what's the best uses of our cash and it's definitely an option.

[Operator:]

The next question is from [ph] Ronald Nisser, Private Investor.

[Unidentified Analyst:]

I have two questions that I'd like to see someone comment on. You mentioned the food industry, everybody has to eat, and what I was seeing is there is a lot of NFC, near field communication enabled vending machines coming off the assembly lines. And I'm wondering is Payment Data Systems can process and handle the NFC payments in the seeable future. That's question one. And the second question, after you ponder this is, could Payment Data Systems provide a quick alternative back up path to the Automated Clearing House when a merchant or banks payment system is hacked? I'll listen. And thank you for the time.

[Louis Hoch:]

Ron, the first question, near field communication, we're already set up to do that, not only as a acquirer or as a payment processor, but through Apple Pay. We already do it. In fact, I recently used my phone on a vending machine using my Akimbo Card. And your second question, can you repeat that for us?

[Unidentified Analyst:]

Yes. Could Payment Data Systems provide a quick alternative back up path to the Automated Clearing House when a merchant or banks payment system has been hacked? It seems like hack attacks are everywhere and are increasing?

[Louis Hoch:]

I don't know if I have the answer to that, Ron. Every hack is different and what's compromise and the solution that individual merchant takes to recover is up to them.

[Unidentified Analyst:]

I just feel like your back office operation, it might be able to come up with an alternative quick plan for somebody that's been hacked. And I just thought I'd throw that in. I know that you're still under development and deployment stage of many things and seems to me that from my experience, working in the railroad industry, handling inbound and outbound traffic that near field communication, aka, radio-frequency identification will streamline anything and everything in the electronic build payment processing and handling loop. Are you going to place more emphasis on NFC? And can you use an NFC-enabled phone, a card and a card swipe device on a smartphone to enhance security?

[Louis Hoch:]

Well, we're definitely focused on making sure that we get our cards into every mobile wallet option that's viable. Right now, there is three of them, there's Apple Pay, Samsung Pay and Google Pay, and the way they deliver the transactions are a little bit different in each case. But through those three implementations, we'll definitely cover the majority of the transactions through our prepaid card offerings.

[Unidentified Analyst:]

One other thing, I worked in a back office where we had to interchange inbound, outbound traffic. And I found out that being in a back office you're out of sight, out of mind to most people. Are you working on any way to advertise your operations from a back office that tends to be out of sight, thus out of mind of investors? That will be my last question, I'll listen in.

[Louis Hoch:]

I think you asked about advertising our company and reaching out to more investors, that's kind of two different things, but we'll address both. Our management team, since we've been on NASDAQ, has been meeting with a lot of banks, a lot of investors and a lot of analysts. Our story has been very well received. And we might have some news out about that in the near future. As for products and services and just general awareness to gain customers, we're definitely focused on that. We are trying to leverage companies that can help us in that case. Like a good example would be Rock RMS, they are out there, they are out there creating customers, they're what we called technology integrator, and they bring us the customers. And we really don't have to spend anything on marketing for that or even sales. And so we love that model, we love when companies come to us and they have a thousand potential cardholders and they want to do a card program. They already have a relationship with those customers. We love those, because we're able to create cardholders without spending a lot of marketing dollars. So you'll see a lot of us doing a lot of things to raise shareholder awareness. You'll see our products and services come out of lots in the marketplace through technology integrators/resellers. And you'll see us do a little bit more than we've had in the past to advertise our products and services directly.

[Unidentified Analyst:]

One other thing you mentioned, the non-profit organizations, are we still connected to Shelby Systems in any way, shape or form?

[Michael Long:]

Yes, we are.

[Louis Hoch:]

We're connected to their platform. And you'll see some more news about it into 10-K. Our referral contract with them expired in February. But again, all the customers that they brought to us have direct agreements with us, so we're not really worried about that.

[Unidentified Analyst:]

All right, sir, thank you very much. Keep playing hardball. And I'll be watching you on a daily basis on the internet each time I can. So have a good evening and thanks for your time and answers.

[Louis Hoch:]

Thanks, Ron.

[Operator:]

We have no further questions from the live Q&A participants. I will now turn the call over to Julie MacMedan to ask the questions that were emailed to management. Julie?

[Julie MacMedan:]

Thanks Amy. Actually a lot of those questions were covered in our Q&A session today. So I'm just going to turn the call back to Michael for closing remarks. Michael? End of Q&A

[Michael Long:]

Thanks, very much really, Julie. And we'd like to thank everyone who participated on the call today. We'll encourage you to give us a call at your earliest convenience to answer any additional questions you may have. It's been a real pleasure for me and the management team, wish you all a great day and a great weekend. Thank you.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.