USIO - Usio Q4: Prepaid Business Is Booming (Rating Upgrade)

2023-03-23 02:25:23 ET

Summary

• The company is recovering nicely from the crypto crash at partner Voyager, which hit their highest margin business, ACH.
• Prepaid keeps on growing very rapidly and is opening a new commercial segment with big customers like MoviePass and large breakage income this year.
• It looks like all four of the company's segments will be growing, with the prepaid business doubling this year and OpEx constant.
• So, it looks to be a good year ahead for Usio investors, markets providing.

Usio ( USIO ) is a payment processor with four different businesses:

• ACH processing
• Card (mainly PayFac)
• Prepaid
• Output Solutions

Here is how these segments performed in 2022, from the 10-K :

We think that the company is set for a better 2023, as some of its segments like prepaid are booming, with millions in spoilage coming to the bottom line.

ACH

We have written about the struggles of the company's ACH business due to the woes of their crypto partner Voyager , which caused the decline in revenues in this segment,

There are pockets of ACH that are growing like returned check transactions (+31% y/y) and PINless Debit (+107% y/y) and management expects a rebound in ACH this year as it's basically a countercyclical business, doing well when the economy falters.

But luckily, the three other businesses are growing and it should be mentioned that the company is starting to benefit from cross-selling , most notably from the LA County contract, an output solutions customer but also using the company's card segment solutions, and it's not the only one ( Q4CC ):

More and more of our clients are becoming multi-product Usio customers, yielding improved margins and very low attrition rates.

Prepaid

Made a very successful transition from helping (local) government (cities, states, counties, and municipalities) programs related to pandemic relief to non-pandemic related programs for cash disbursement such as guaranteed income programs, and growth is really catching on.

These programs are generally a little different (Q4CC):

while these programs consist of smaller card orders, they are longer in duration and have larger recurring card loads. They are expected to provide a steady recurring revenue stream over several years.

The company is also moving away from the public sphere serving private customers for corporate expense programs , opening a whole new segment for the company's prepaid business, and this seems lucrative (Q4CC):

This is not only a new growth market, but corporate expense programs typically provide higher average purchase transactions and generate 60% to 65% more interchange on a percentage basis.

The first major success here is that they have an exclusive partnership with MoviePass where they ( company PR ):

MoviePass, which leverages Usio’s innovative and proprietary prepaid card issuing platform and unique external authorization engine to fund transactions for the MoviePass Debit card

Given that external authorization tech is complex, this is a more profitable line of business for the company than most of their prepaid card programs.

Well, management let us know MoviePass already had 800K individual signups for their beta program, so this is looking like something that is really going to move the needle. MoviePass has about 137K cards out, 100K of these in January.

And that's not all, they're also the processor for Mobile Money 's reverse ATM solution (machines that accept cash and turn it into a debit MasterCard) which is useful in stadiums and venues.

A large New York contract has ended, but revenues from it will still continue in the form of significant breakage (the residue balances of expiring cards), from the Q4CC:

The balance of spoilage and breakage still to be recognized is approximately $15 million with approximately $10 million to $12 million of this revenue expected in 2023.

That adds up and we have otherwise already an exciting year ahead (Q4CC):

And with excitingly, potentially very large new programs beginning with highly recognizable brands like MoviePass, we see a path to potentially almost doubling prepaid revenues in 2023

Revenue was already growing 31% y/y in Q4 (and already containing breakage from the NY contract) so this means a considerable acceleration, although it remains to be seen how much the breakage causes this.

Card

Compared to prepaid, their card business is actually a little disappointing us managing just 4% growth (8% for FY22) in Q4 although what is supposed to be the company's crown jewel, PayFac did better with 25% increase in dollars processed in Q4 and 32% for FY22 with onboarded merchants increasing by 15% over FY21.

Things also look up here and management expects an acceleration of growth which is already underway with records in January and February 2023 and three new ISVs going live in March. They have a large queue of 38 ISV partners waiting to be implemented.

Readers might have noticed that PayFac is growing much faster than the whole segment, this is because they are actively promoting PayFac and managing the attrition of the legacy (non-PayFac) programs.

Output Solutions

OS had a great year with revenue up 24% for the year and 27% in Q4 and expanding gross margins to 19% in Q4 on the ramp (up from 13% in Q1/22).

They have a significant contract with LA County here which management expects to ramp this year for OS but it has been generating revenue on the prepaid for two years already.

Finances

Revenue grew 7% but gross margins increased sequentially (although down to 21.1% for the year from 25.2% in FY21 due to the decline in ACH, their highest margin business.

The company produced a $100K OpEx loss and a $1M adjusted EBITDA profit, but a loss of $421K for FY22 on the ACH/crypto woes. Cash increased by $1.1M from the end of Q3 to $5.7M.

OpEx is likely to remain flat for FY23 at roughly $15M as they do not need any more spending on infrastructure. The company even bought back 500K shares in FY22.

Valuation

Shares: 26.4M and 4.99M options and USIO stock awards for a total of 31.4M fully diluted or a market cap (at $1.7 per share) of $53.4M and an EV of $47.7 which results in an FY22 EV/S of 0.69x and an FY23 EV/S of 0.56x, there is room for multiple expansion here.

We have to see whether analysts revise their (average) earnings forecast of a 3 cents loss in FY23 but given the bullish tone for the year that doesn't seem unlikely to us.

Conclusion

The company could very well have all four guns blazing this year, with ACH recovering from the crypto/Voyager crash, accelerating growth in PayFac and prepaid, with a commercial market opening up in the latter as well as a breakage bonanza.

We think we've seen the lows in the stock and can look forward to higher prices. The main risks are a worsening economy (although that could actually be positive for their ACH business, which is their highest margin business) or a bear market.

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