Hello, and welcome to the Usio Third Quarter Fiscal 2024 Earnings Conference Call. All participants will be in a 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 Third Quarter Fiscal 2024 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 with me are Louis Hoch, our Chairman and CEO; and Greg Carter, Executive Vice President of Payment Acceptance. Michael White, Senior Vice President and Chief Accounting Officer; Jerry Uffner, Head of Card Issuing; and our Chief Product Officer, Houston Frost, will also be available during the question and answer. Let me remind our listeners that certain statements made during the call today constitute forward-looking statements made pursuant to the safe harbor provisions of the Private Securities and Litigation Act of 1995 as amended and as more fully discussed in our press release and in our filings with the SEC. Let me start off with some great highlights from this afternoon's release. Momentum remains strong with results in the third quarter generally in line with expectations and with GAAP earnings significantly better than expected. GAAP earnings this quarter include an income tax benefit as we increased our deferred tax asset, reflecting our projections for higher taxable income. For the quarter, total payment dollar processing volume growth accelerated to 46% from 24% last quarter, while transactions processed were up an equally impressive 31%. And once again, all of our electronic transaction processing businesses grew with prepaid setting new all-time records for card loads, processing and transaction volumes. In addition, we have the strongest pipeline of signed deals and the largest backlog of pending implementations in the company's history. While revenue growth was modest, it is important to note that we are replacing nearly $12 million in annualized revenue from the New York City COVID…

Thank you, Paul, and good afternoon, everyone. Card had another solid quarter. Transactions processed were up a very healthy 22%, dollars processed up 7%, and we recorded another quarter of significant PayFac revenue growth, up 27%. Keep in mind that while we continue to support our legacy portfolios, all of our efforts are focused on PayFac so that revenues for the card segment are net of the natural anticipated attrition of a service we no longer market. In contrast, we are experiencing virtually no attrition in the PayFac portfolio. Let me start with a quick update on the large leading web-based ERP ISV recently signed. We continue to make progress with their non-franchisee merchants, and those are getting boarded, with several already processing reasonable volume. The largest opportunity is with their franchisees where they continue to push out the start of their pilot. So while implementations have been slower than anticipated, we continue to make progress and support their efforts for a wider implementation. More importantly, we've had a very robust onboarding quarter with respect to legacy or existing ISVs with our merchant conversion from the entire ISV base remaining very strong. Right now, there are over 20 new ISVs that are working with us in some stage of implementation. One of the most encouraging is an association management software company that has extensive customers in the legal space. What has me excited about this new customer is the rapid pace at which they've implemented and the unbelievable relationship we've already developed with them. They've already provided their customer list, and we're bringing on their customers much sooner than is typical. This is an excellent case study. They chose Usio for many of the same reasons we see with all of our ISV clients. Our economic solution was attractive. They…

Thank you, Greg, and welcome, everyone. I just want to reiterate what you heard from Paul and Greg. While the quarter's results were basically in line with expectations, the real story is the increasing strength of our organization, the steady improvement in our financial condition and most importantly, the record backlog of pending implementations and the sales pipeline we have built through the introduction of innovative new products and the care we exercise in assuring the success of our customers. So let me quickly conclude today's prepared remarks with some high-level observations on the business, starting with ACH. ACH revenues were up 22% in the quarter and are now up 10% for the year, our fifth consecutive quarter of recovery. Performance is now approaching that of our previous participation in the cryptocurrency industry. But in this case, it is comprised primarily of reoccurring revenue from less volatile industries. Volumes were very strong. Electronic check transaction volume was up 25%. Check dollars processed was up 61% and returned checks processed up 18%. All of these growth rates once again accelerated from the preceding quarter, and October was just our highest ever ACH processing month. As our highest margin business segment, this recovery continues to favorably impact operational profitability. I will note that ACH has been one of our main beneficiaries of our integrated sales and marketing approach. Both mobile money and more recently, Greg's new association software ISV have added ACH to Usio services that they already use. In fact, we estimate that the association's ISV alone should increase our ACH volumes by more than 10%. And as we announced during the quarter, ClassWallet has also added Usio ACH to payment solutions that they offer to their customers. We continue to invest in real-time payments initiatives as we await the widespread…

[Operator Instructions] The first question today comes from Scott Buck with H.C. Wainwright. Please go ahead.

Hi, good evening guys. Thanks for taking my questions. Louis, I'm curious, when do you guys start to anniversary the COVID spoilage from New York? Is that in the first quarter of next year?

When does it end? Is that what you're saying?

No. When does it anniversary? When do the comps start to look easier?

It's going to be second quarter of next year.

Okay. All right. That's helpful. And then I wanted to ask about the gross margin difference between electronic and paper in Output Solutions. You highlighted the kind of shift there. I'm curious what that could mean over time in terms of margin improvement.

Well, electronic is almost pure margin, right, when we create a PDF and deliver it electronically, and paper is about 20% gross margin. So you can see that the opportunity to increase gross margin is great by producing more electronic.

Yes. No, that makes a ton of sense. And then last, you guys are really starting to stack some cash on the balance sheet. How are you feeling about potential acquisition or just general thoughts on capital allocation?

Well, it's good to have cash. It's good to be continuing to generate cash. So we're excited about that. The M&A market these last two years has not been great. We've looked at numerous deals, and we haven't found one that had our criteria of having synergies and that we can buy it right and it's able to take care of itself. And so we continue to look. We're hopeful that the M&A market is going to get more exciting after the election is now concluded, and we'll continue to look.

That’s it for me. I appreciate the color.

Thanks, Scott.

[Operator Instructions] The next question comes from Jon Hickman with Ladenburg. Please go ahead.

Louis, could you -- the margin on Output Solutions used to be like 20%, 21% when you kind of were giving us that number. With the new equipment and more electronic, what's a better number for that going forward, that division?

24% to 25%, so mid-20s.

Mid-20s now?

Yes.

Okay. Then I have another question. So sequentially, the gross margin was down about 1% this quarter from Q2, whereas you talked about Output Solutions being better, more ACH number. Where did the decline in gross margins come from?

So a lot of it had to do with the spoilage in New York City that we talked about that's no longer -- we're no longer receiving the benefit of that. So the margins on that revenue decreased as the year went on in 2023. But overall, that's really the biggest change there in our overall gross margins.

No, I'm talking about sequentially from June to September.

Excuse me. So that is really just a mix in product lines, really. So it's a mix on where our revenues are coming from. Specifically in Prepaid, we can have big cardholders that have less margins versus revenue coming off on spend, which is higher margin. So it's really just due to the mix in revenues.

Okay, thank you.

Thanks, Jon.

There are no further questions at this time. This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.