Usio, Inc. (USIO) Earnings Call Transcript

Welcome to Usio's Second Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Michael White, Senior Vice President and Chief Accounting Officer. Please go ahead, sir.

Thank you, operator, and thank you, everyone, for joining our call today. Welcome to Usio's Second Fiscal Quarter 2026 Conference Call. The earnings release, which we issued today after the market closed, is available on our website at usio.com under the Investor Relations tab. On this call with me today are Louis Hoch, our Chairman and CEO; and Greg Carter, Executive Vice President of Payment Acceptance and Chief Revenue Officer. In addition, Houston Frost, Senior Vice President and Chief Product Officer; and Jerry Uffner, Head of Card Issuing, will be available during the question-and-answer session. 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 more fully discussed in our press release and in our filings with the SEC. Following our prepared remarks, there will be a question-and-answer session for those who registered as a financial professional. Let me offer just a few brief comments on the quarter before turning it over to Greg and Louis. We once again met or beat all analyst expectations on both the top and bottom lines while also delivering our second consecutive quarter of positive GAAP net income and earnings per share. Revenue growth remained strong in the second quarter, up 19%, accelerating from 15% in the first quarter. Excluding the impact of interest income, growth at the business unit level was even stronger, approaching 20%. This has led to a very strong first half of the year. As we move through the second half of the year, we remain focused on executing our strategy and leveraging our innovative technology and diversified business operations to drive continued growth across the markets we serve. In 3 of our product lines, credit card, ACH and Output Solutions, revenue was up over 20%, illustrating continued strength across Usio. Once again, a majority of the quarter's revenue was recurring in nature with no one client accounting for more than 10% of total revenue. Client retention remains high. Total processing transactions also set new records with total payment dollars processed up 27% and transactions up 27%. Profitability continued to improve. Gross profit dollars increased 12% with margins improving sequentially from the first quarter. Total selling, general and administrative expenses were down approximately $190,000 from a year ago. Excluding depreciation, amortization and stock-based compensation, SG&A was down marginally from a year ago despite the 19% increase in revenues. We remain focused on maintaining a disciplined cost structure as we continue to grow, providing further opportunity for operating leverage. Adjusted EBITDA was $1.1 million for the second quarter of 2026, more than double that of the year ago quarter. For the first half of the year, we generated $1.9 million of adjusted EBITDA, our best first half in years. We reported positive net income of $280,000 or $0.01 per share in the quarter. Again, net income was from core operations and does not include any unusual, nonrecurring extraordinary or onetime items. This marks our second consecutive quarter of positive GAAP net income, an important milestone and an area where we remain intensely focused. While operating cash flow was lower in the first half compared to last year, adjusting for the $1.5 million employee retention credit received in the prior year period, operating cash flow actually increased year-over-year. Cash and cash equivalents at the end of the quarter were $6.4 million, down from the beginning of the year, primarily reflecting the timing of several annual cash outlays during the first half. In addition, we used approximately $371,000 to repurchase 281,000 shares of our common stock during the 6 months ended June 30, 2026, including $235,000 in the second quarter. We also continue to invest in strategic growth initiatives, including capitalized development work on Usio Ion. Overall, we are very pleased with our performance through the first half of the year. We are delivering strong revenue growth across the business and maintaining disciplined control of our cost structure to translate that growth into improved profitability. With that momentum and the opportunities we see ahead, we believe we are well positioned for a strong second half of 2026. Now I'd like to turn the call over to Greg Carter.

Thank you, Michael, and good afternoon, everyone. It was another strong quarter for Card. Revenue was up 28% year-over-year to $9 million with growth accelerating from the first quarter and the best ever second quarter revenue. Dollars processed were up 13% and transactions processed were up 19% from a year ago. Once again, results were driven by the strength of our PayFac business, where revenue was up 43% in the quarter. PayFac continues to represent over 3/4 of Card's revenue and is the primary driver behind the inflection in our revenue growth rate. The second quarter was consistent with the growth path we established years ago when we introduced our evolutionary PayFac technology. The formula is straightforward. PayFac's innovative technology attracts new accounts, they get implemented, they steadily bring their merchants onto our platform, and those merchants' volumes grow over time. Just the first 6 months of this year, merchant count has increased to 34%. So we have the flywheel of growth spinning nicely. For instance, our large bodega-oriented health care account has been steadily ramping. In fact, based on the industry buzz created by this implementation, we now have another very similar opportunity. Headed into the school year, we are seeing nice growth with our education-oriented accounts, and we anticipate a nice pickup in the third quarter from a couple of new ISVs that are ramping up. There have also been more omnichannel sales wins, something we've been emphasizing with our sales organization. Whether they be entities that need onetime or on-demand printing services or a complementary disbursement solution, we signed more of those type of accounts in the second quarter and continue to do so. Our consolidated sales team is more cohesive and more interactive than it's ever been as a part of the implementation of Usio One, and we only expect the system to improve overall sales performance. In general, we're just getting more productive and efficient. In addition to the increased productivity of our sales organization, we are likewise seeing improved efficiency in our operations, which is helping margins. Essentially, everyone in Card's back office is a certified payments professional. So we now have an increasingly professionally educated and highly tenured organization. We just continue to get better in all facets of the business. Now I would like to turn the call over to our Chief Executive Officer, Louis Hoch.

Thank you, Greg, and welcome, everyone. The second quarter was another strong quarter. For the second time this year, we met or exceeded analyst revenue, adjusted EBITDA and EPS estimates, and we generated positive GAAP net income and EPS. All of our key performance indicators were strong. Total payment dollars increased 27%. Payment transactions processed were also up 27% and revenues were up over 20% in 3 of our business lines. At the midway point, we are on pace for one of our best years. And based upon our performance and outlook, we are raising our full year revenue growth guidance, and we believe there is tremendous potential for even more growth ahead. There's a lot to talk about this quarter, so let me get right into our performance and the drivers behind our success. In our most profitable business, ACH, revenues increased 21% with transactions up 34%, dollar volume up 28% and returned check processing up 35%. That momentum has continued into the third quarter with July setting a new monthly ACH transaction record. If these trends continue, we will be on pace for our sixth consecutive quarter of ACH transaction volume growth. PINless debit and real-time payment transactions have both remained strong. While we are seeing some customers shift transactions from PINless debit to RTP, RTP transactions generally generate higher margins despite carrying a lower cost per transaction. As a result, this shift will benefit overall profitability, although modestly weighing on the top line revenue. We are now processing RTP transactions for 12 accounts from 0 last year, and we expect to see RTP revenue continue to grow at a strong rate. As one of the industry's new payment channels, our ability to capture RTP volume is indicative of our ability to innovate and develop new technology that is responsive to emerging payment needs. Card issuing delivered an improved quarter despite continued revenue headwinds, demonstrating the strength of the business model, disciplined expense management and a meaningful progress on strategic growth initiatives. Purchase volume rebounded up 11%, although card loads were flat and transactions down slightly. These are all improvements on a sequential basis. In the quarter, issuing signed 16 new clients with over 20 clients in implementation or with volume scaling. Of course, one of our most exciting opportunities on the horizon is the school voucher programs. Some states have already begun going live with additional states expected to follow over the second half of this year and into 2027. The potential scale of these programs is significant. One state alone is expected to disburse approximately $1.2 billion. And while these programs represent an exciting opportunity for our card issuing business, a lot of the initial disbursements have been ACH. In line with our strategy, this one account is a revenue opportunity for multiple channels of our payments platform. Importantly, this program is with an existing client with whom we've already integrated. So some of the heavy lifting is finished. Consequently, we can focus on all of our energies on getting these programs rolled out. We also expect to begin distributing university loan payment refunds for several universities through a fintech strategic partner during the second half of the year. Our partner currently works with 30 universities through another processor, and we believe there is an opportunity to transition those programs to Usio over time. The potential payment volumes are significant, making this another exciting growth opportunity for card issuing. Output Solutions continues to have an outstanding year. Revenues increased 22% in the second quarter, accelerating from 19% growth in the first quarter. Pieces processed and mailed increased 43%, while electronic documents processed and delivered were up 49%. It was Output Solutions' strongest second quarter by a wide margin with the business setting a new monthly revenue record in each successive month of the first half of the year. We also have our new high-speed printer online, representing a significant upgrade to our production capabilities. The new equipment is approximately 4x faster than our existing printer and offers 4x the resolution, expanding our ability to support both transactional and higher quality print work. Importantly, we expect it to be more cost effective as well. The increased speed requires less labor for the same level of output, while newer technologies should reduce maintenance costs and even lower ink cost despite the significantly higher print quality. To get a sense of these capabilities of this new equipment, I encourage you to take a look at the video that we posted on our Usio LinkedIn page. In the second quarter, Output signed 11 new contracts and renewed 2 other existing agreements. This includes a large alternative retail deregulated electric provider that happens to be one of the 3 largest in the state of Texas. It is also encouraging to note that their success is not going unnoticed. Inbound traffic is on the rise, which over time, we believe will be a boost to the business. In addition to the growth opportunities within our existing business, we have some new products under development that we expect to be launching in the near future. Most importantly is Usio Ion, the name we have chosen for PostCredit. While there's still work to do, we are making great progress. The concept has been floated by a number of existing clients, and the response has been overwhelmingly positive. We expect to host a demonstration of Ion in the near future and look forward to giving you a closer look at the platform so you can get a feel for the opportunity we believe it represents. Let me close by reiterating our continued focus on margins and profitability. We have several tailwinds that we believe can support continued margin improvement. These include more profitable transaction mix from products such as RTP, our lower production cost at Output Solutions and the continued rollout of Ion. At the same time, we remain focused on our cost structure. As one example, our increased processing volumes have enabled us to secure improved pricing from our sponsoring banks beginning in the third quarter. Together, we believe these initiatives provide multiple opportunities to drive greater operating leverage and improved profitability as we continue to grow. As a result, we are now raising our full year guidance. For fiscal 2026, we now expect revenue growth of 14% to 16%, up from our previous guidance of 10% to 12% expectations. We also expect to continue to generate positive adjusted EBITDA as we remain focused on driving greater profitability and operating leverage across our business. So a great first half with a lot of strong results and increasing prospects for better growth and profitability. Most of our businesses are growing at better than 20%, and we have exciting opportunities to sustain, if not improve our long-term growth. There's also an intense focus on profitable growth. I want to thank the Usio employees for their continued dedication and commitment to growing our business, strengthening our company and creating long-term value for our shareholders. Operator, you can now open the call to questions.

[Operator Instructions] The first question comes from Neil Cataldi with Blueprint Capital.

Great quarter. My first one is you mentioned PayFac merchant accounts up 34%. I was wondering if you could talk a little bit about this flywheel, as you called it, maybe for those newer to the story. What's the flywheel? And why is it really kicking in right now?

Well, as I said, the beauty of our PayFac model is we secure these ISVs or these software companies that may have anywhere from 100 to 500 subscribers today. Fast forward if their business model goes like our current ISVs 4, 5 years down the road, that merchant base goes to 500 to 1,000. And as those onboard with the software companies, we get access for providing payments to those entities. So that, combined with the number of ISVs we've put on over the past several years, that's the flywheel of growth. It's an incredibly robust business model. And again, as we add more ISVs, the ISVs then in turn add merchants, which become our merchants by default. And that's the third leg of the stool. New ISVs, ISV growth and then merchant growth within that community.

That's helpful. It's great to see that kicking in. A couple more. So last quarter, you guided gross margins to improve towards 23% to 25% you said in the short term. 24% today is great. And I think the color on this call has been very helpful. With the new programs launching that you just discussed, is it reasonable to assume that maybe we can go even above 25% over the next few quarters?

The key to the growth there is going to be the full launch of Ion, which the way we make money off of Ion is through float primarily and some card spend, but float is obviously 100% margin for us. So Ion is going to be a big catalyst for increasing our margins.

Okay. And regarding net interest income, which I think is what you're talking about, how should we think about a recovery there through the second half as the education programs come on?

Well, the education programs, some of them have already started a little bit. Most of that traffic is occurring through ACH. And we remain very excited about the 2 verticals in the education or the 2 instances. One is school voucher programs that we talked about. I believe we've gone from 3 states to 2 states to -- how many do we have now? Around 5 or 6 that we'll be doing voucher programs for. And what's nice about these programs is it's not like all the money is disbursed when school starts, it actually happens over the course of a school year. So we'll start seeing some good volume from that occur when school kicks off here in August and September. And the other program is Title IV payments. Those are school loan -- yes, school loan refunds, which we have 1 university coming live in this third, fourth quarter. But that one customer or that one reseller works today with 30 universities, and we're hopeful that we're going to get all of that traffic.

Okay. And just to clarify, I think -- did you say 5 or 6 states on the school vouchers? Or did I not hear that correct?

Yes. That's correct. I think the last time we talked, it was 2, and we've added a few.

Okay. And maybe some ballpark on what total volumes would be across the 5 to 6?

Around $1.5 billion.

Okay. Okay. And my last one is just on the ACH tailwinds. So Nacha, I think I'm saying that right, data shows that the P2P ACH is growing like 21%, same day is up 30%. The industry seems to be moving towards what you guys have built, which is this like embedded multi-rail kind of infrastructure. So my question is, as AI, I think, sort of transforms SaaS companies and how they operate, do you guys have any thoughts on how embedded payments become more of a determining factor in which platforms win? And do you think that's sort of starting to show itself a bit in the ACH tailwinds you're seeing?

Well, it's definitely going to benefit PayFac, which includes Card and ACH. But AI is making some software development tasks easier. And what used to be competitive in software development was building software and having great infrastructure. Now people are able to reproduce it easier. So those software companies are looking for ways to increase the value of their platforms. And the best way to do it is to embed payments and make a financial tool out of your software application, which is an absolute perfect fit for our PayFac-in-a-Box offering. And so we think as time evolves with AI, that will create even more opportunities for us in PayFac.

[Operator Instructions] The next question comes from Barry Sine with Litchfield.

Very good quarter, both the results and the nice surprise in positive guidance. It's almost as if you guys are carrying around lucky rabbit foot. I'm trying to understand the drivers. You gave out a lot of key points. And it seems to me that the new -- well, I guess, not so new anymore, Usio One strategy really is working. You've changed the compensation. You're now -- your team is cross-selling all the products. So we're seeing new customers. We're seeing new products with existing customers. And then you also have introduced new products like RTP, and it sounds like Ion is part of the new guidance. Can you elaborate a little bit more, please?

Well, obviously, we're very excited about Ion. We think that's a catalyst for not only top line growth, but will increase our margins, and we look forward to the full rollout of that. It's going to take time for us to do that. But we already have a handful of customers beta testing for us and the results are good. And every part of our business is doing really, really well. And it's showing credibility to our strategy of having all payment channels, too. We're seeing some PINless transactions go to RTP. And while RTP transactions have less revenue, they have higher margins. But if we didn't have RTP, we would have missed out on that traffic and that traffic continues to grow really well. When RTP allows for debits instead of just pushing funds, we'll see a big jump in usage of RTP for our customer base. But our existing customers continue to grow and we're doing a great job of landing new deals as well. And so we're just -- we're optimistic about this year and our future growth.

So if I can drill down a little bit more on PayFac. So in the past, you've talked about -- I don't know if I missed it, but the PayFac growth rate in the quarter. But you've also, in the past, had a bit of a challenge onboarding PayFac customers or PayFac merchants rather not customers. It seems like you've solved that. Could you give us a bit of an update on PayFac and where you are now? I mean it seems much improved versus a couple of years ago.

Yes, Barry, it's really lather, rinse and repeat. I mean we've been doing the same thing for the last 7 years. And what we're seeing now is all that comes to fruition. While we sincerely appreciate everyone's patience, if you look back historically, there has been a slow but steady upward climb of the PayFac revenue model, and now we're just seeing the benefits of that. So it isn't that we're -- we found some secret sauce. Really, the key is adding as many ISVs as we can possibly accommodate into the implementation queue and then working with each entity, each ISV individually to help them with that transition on the merchants. And really, that's been the secret. But I think it's also just a culmination of doing this for many years and that patience and persistence is paying off.

What was PayFac growth in the quarter?