Hello, and welcome to the Usio Fourth Quarter and Fiscal Year-End 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. 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.

Thank you, Operator, and thank you everyone for joining our call today. Welcome to Usio's fourth quarter in fiscal 2023 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 today are Louis Hoch, our Chairman and CEO; Greg Carter, Executive Vice President of Payment and Acceptance; and Houston Frost, Chief Product Officer; Michael White, Senior Vice President and Chief Accounting Officer will also be available for the Q&A. 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. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties are described in our earnings press release and in our filings with the SEC. The forward-looking statements made today are as of the date of this call, and we do not undertake any obligation to update these forward-looking statements. During today's call, we will refer to non-GAAP financial measures such as adjusted EBITDA. Our earnings release includes a reconciliation of adjusted EBITDA to GAAP operating income. Management will provide prepared remarks, then we'll open a call to your question. So let me start off with some highlights from this afternoon's release. I am pleased to report another quarter of strong growth with quarterly revenue up for the 13th consecutive quarter, as well as another quarter of positive adjusted EBITDA. This led to record revenues for the year, our seventh consecutive year of revenue growth. As a result, we met both our top and bottom-line guidance for the year with revenues ahead,…

Thank you, Paul, and good afternoon, everyone. Card revenues were up again in the quarter leading to a record for the year. Card growth was once again led by PayFac where processing volumes were up 17%. Transaction volumes were up 35%, and revenues were up 25%. So PayFac continues its strong growth. However, the full effect is being somewhat masked by attrition in our legacy singular ISO portfolio, we had purchased singular primarily for their payment technology. Once that technology was developed into our PayFac solution, we essentially stopped selling into the ISO channel. Right now, the two portfolios are about equal in size, but as PayFac continues to grow and become a larger proportion of our card portfolio, total card revenue growth will accelerate. All of our card efforts are therefore completely behind PayFac. First is our portfolio grows, the number of merchants onboarded continues to climb and now exceeds 100 per month. And as these merchants grow in the aggregate, the amount of their processing volume correspondingly increases. Each year, we are layering additional processing volume on top of the prior year's volume. This is essentially a built-in growth engine as we've experienced very little attrition in our PayFac portfolio, but new implementations are the key to faster growth. In the fourth quarter, we completed two significant new implementations, each of which when extremely well. After a long period of blood, sweat, and tears I'm becoming increasingly excited with the success of our organic business development efforts. This has led to a number of new agreements that should begin implementation and start to generate volume later this year. PayFac adoption is a phased process and each ISV is different. I am confident we will have implemented many more new relationships, all of which will be processing with Usio…

Thank you, Greg, and thank you to everyone participating in our call this afternoon. Card issuing had a strong finish to a record year for the second consecutive quarter. Card loads exceeded 100 million, bringing loads for the year to a record 371 million. We are seeing strong momentum in card load volumes continuing into the new year. As we often mention, card loads are an important forward-looking metric as they are the precursor to the interchange and transaction fee revenue generated in subsequent quarters. They also can be used in rough projections of inactivity fees and breakage that can be assessed on certain card accounts, generally beginning 12 months or more following the loads. Because of the inconsistency inherent and revenue stemming from the large New York City and other limited duration pandemic related programs. We believe this run of record load volumes is more indicative and informative of the underlying strength of our card issuing business. Card load volumes are coming from not only an increasingly diverse group of clients and program types, but from the growth of long-term clients that started out small and are now substantial. Class wallet, mobile money, and others are good examples. As these organizations grow and their programs expand, our card issuing business follows. In contrast to the volatility that can arise from the addition and discontinuation of large limited duration programs. These clients are more representative of card issuing current focus, so while our total 2024 revenues will be down if you exclude large programs, I expect our core business to deliver another year of attractive growth. With continued growth and load volumes. We are building a solid foundation to support our future growth. I would also like to quickly recognize the diversity of markets we serve and solutions we offer.…

Thank you, Houston, and welcome everyone. As you've heard from our team, it was a solid finish to what was another year of record revenue and it was our seventh consecutive year of revenue growth. We met our guidance for the year growing revenues 19%, and increasing adjusted EBITDA by $3 million as we continually evolve our model to improve leverage, drive more top line growth to the bottom line, that will be a major theme for 2024. With much of the heavy lifting behind us, we are achieving scale in many of our businesses so that we can focus on driving more of the growth to the bottom line. That is demonstrated in our 2024 guidance. Again, results reflect our diversified business strategy, diversified in the markets we serve and the payment channels we offer. What many investors may not realize is that much of our revenue is reoccurring in nature through regular streams of card and ACH payments and prepaid usage. As we add accounts, we build a solid foundation of reoccurring revenue on which to grow further. Let me quickly go through a couple of our business lines. Output solutions had a great year, despite mile slow down in the fourth quarter, precipitated by capacity constraints. That business will now shift over into the first quarter of this year. To address this constraint, in the fourth quarter, we invested in new equipment that will enable output solutions to increase capacity by over 50%. This new technology not only expands our capacity, but it adds new capabilities such as peace level validation that will get us into new markets such as healthcare and other larger jobs. These markets demand an unsurpassed level of uncompromising precision, which we will now be able to deliver. In addition, this new technology…

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Scott Buck with H.C. Wainwright.

Louis, I was hoping we could dig in a little deeper on the guide and I'm trying to understand what your visibility is for the year in terms of what of the 10% to 12% growth may already be baked into current contracts versus what you have to go out and earn between now and year end.

Our first hurdle this year is to replace the spoilage revenue that we had last year that will not be at the same level this year. We're doing that through other business units expanding through both organic growth within the current base and some new clients. As we said on our call or opening notes, our pipeline is very, very rich and we have -- what we call kind of mega deals, which are $5 million or more in annual recurring revenue. And we'll have more news out about some of those clients as we close those accounts. So, this year, where we're focusing on enhancing our operating leverage, that will increase more EBITDA adjusted EBITDA growth and actually yield earnings per share this year. And so, this year of EBITDA for us.

And then on the payback capacity increase, what have that has already spoken for? I mean, what kind of demand are you seeing there? And I know you bumped it 50% or so. What kind of runway does that give you before you need to start thinking about capacity again?

I don't think you meant payback document or output solution. In the fourth quarter, we didn't complete all the work that we could have completed because we were installing new machinery. So that actually got pushed into this first quarter. So, for -- six months before that, almost all the year we're operating at a hundred percent capacity at Usio output. We purchased some new devices, new machines that increased our capacity 50%. So we're able to complete a week's worth of our normal work in 2.5 days now. And we're already seeing benefits from that, and so we're able to take on more work from existing clients. And some of our clients are large enough that they work with not just output solutions, but they have other print providers and we may be the preferred one, so we can go back and get more volume from them now.

And the 200 or so million on the prepaid program that you guys have gotten over the last two quarters, what of that has been dispersed to cards or versus what you're holding on in your accounts currently?

Well, it is that 200 million would be in either on cards or that money would be in our bank account hasn't been loaded yet. And if you look on our balance sheet that we're reported, it'll say the exact number of what's sitting in our bank account that hasn't been loaded. What's that number, Michael?

$32 million.

So 32 million, and then I can't tell you off the top of my head how much is on cards. It's probably around.

It's approximately the same, and just real quick, Michael, the card load figure that is the dollar loaded to cards not funds waiting to be loaded to cards. Is that accurate? I'm pretty sure that figure is card load and does not include funds waiting to be loaded.

So 32 million Houston is what's sitting in our bank account waiting to be loaded as at the end of last year, and there's roughly about 40 million on cards right now.

I appreciate the clarification there, that's it for me. Appreciate the time guys, and congrats on the results.

The next question comes from Jon Hickman with Ladenburg Thalmann.

So, couple of questions. Could you specify how much of the New York, how much breakage you did recognize in Q4, and then some sense of what that might be going forward?

I don't think we released that number. I know that we're still going to have some breakage till the end of the second quarter of this year. But it is the significant drop off occurred at in Q4.

And then could you comment on the settlement between Visa and MasterCard about what they can charge retailers and stuff? How does that work into your card, into the interchange fees that you guys are going to get?

I assume you are talking about the recent news, that case has been pending for, I don't know, five years, something like that.

Yes, it seems like they settled it today.

Yes, to be honest, I'm not well versed on that. What's important to understand is we set our prices, so even if Visa and MasterCard, have to lower rates, we do not. And so, in most cases when things like this happen with interchange, it just increases our margins. But I will go back and review it. I'm not sure if they changed anything with interchange rates because of this.

And then I have just one more question. You have mentioned that you have four, like really big PayFac opportunities. I assume that none of those are in your guidance for the year. Is that true?

We assume some new growth from accounts in PayFac. I mean, we ended the year with the number of accounts. I'm sure Greg can quote the number that have already been sold in that are in implementation. So we're going to get some growth there. We were also seeing organic growth from the existing accounts. But what we're really excited about this year is something that we haven't had in the past is that, we have four accounts that we consider Omega accounts and they really moved the needle and we should have some news describing at least one of them shortly.

Yes, but my question is, have you put those in your guidance for the year or not? Those four, they're not specifically those four.

Yes, they're not. But so, we did do some increased sales in our guidance.

Yes, I get that. I just wanted to know about those specific four.

Yes, that's why we're saying that really moved needle for us as we close these.

The next question comes from Gary Prestopino with Barrington Research.

A couple of questions here. Greg, you went through some metrics on processing volume, transaction growth and revenue growth. I just want to make sure, and this was for PayFac, I assume so could you just repeat that? Was that a Q4 number or was that a year number?

That's a 2023 number. And that was for PayFac only.

What was the processing volume up?

17%.

And transactions were up 35% and revenue was up 25%?

Correct.

And as I just go through my notes here, at this point, both portfolios are equal in size in terms of revenue generation or just in terms of what processing merchants, whatever?

Revenue.

So for this year, as PayFac grows, we should see PayFac starting to become a bigger part of the business and possibly see some acceleration in the revenue generated from card.

That's correct.

And then I just want to understand this, Houston, with this, this card load. Well, first of all, I want to understand you had about 10 million of breakage revenue that occurred in 2023 that the bulk of which will not be repeated. Is that correct?

There's probably 2 million or less remaining that will come out very slowly through the remainder of the year. But now there's going to be breakage and inactivity fees assessed to other programs. So we're really only referring to New York City with those numbers. So I'll pause there and see if I answered your question.

No, that's fine. What I'm trying to understand is, I mean, if there was 10 million of breakage, you basically doubled your revenues. I mean, was that like at such an extremely low diminimis margin to the business?

The overall margin on that 10 million or 12 million was over 30% kind of on average. So there was a little bit of a steering system that occurred there, but so different quarters had different margins but it was approximately 35% overall. But some quarters were higher margin. And then, there was some tiering that occurred.

So you say it had a 35% gross margin?

On average for all the breakage on that particular program during 2023.

Then in looking forward to what you're doing for this year, you got 371 million loaded on the cards, right? Is that correct? As I'm going through my notes,

That's 2023 numbers.

That's loaded on the cards with the expectations that that should be spec. So, is that coming in at a much higher margin? Because I mean, you're losing 10 million in revenues at 35% margins. I mean, is this new business that you're putting on the books at much higher margins than that 35%? I'm just trying to get to how you get to where you want to be.

Well, a couple things. One is yes, specifically referring to breakage, our margins will be higher on smaller programs. But the other thing that to recognize here is that breakage is going to become a less significant component of our revenue generation. So what we're seeing is a substantial increase in corporate expense volume, which has higher interchange for us and much larger margin on that interchange. We're seeing some more custom programs where they're direct client fees, and so that has a certain gross margin associated with it. And then again, to reiterate, the most important thing to realize is that card load volumes will go up from 2023 to 2024. So, you're going to see acceleration really beginning in Q2, but then even more so Q3, Q4. But we're going to have a lot more dollars running through the card. While the breakage component of the revenue, it is going to go down, we're going to be generating more revenue on interchange transactional fees as well as client fees.

This concludes our question-and-answer session. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.