Tentative Sign Of A Turnaround At Usio Inc.

Feb. 07, 2020 12:22 PM ETUsio, Inc. (USIO)1 Like


  • The company's operational performance has been on a long-winded gradual decline, and so has the share price.
  • There are signs emerging that this could come to an end, but these signs are quite tentative.
  • So it will take investors with an outsized risk appetite to step in here, others might want to wait for confirmation in company results.

Usio Inc (NASDAQ:USIO) shares have been lingering for years:

ChartData by YCharts

This isn't surprising as operationally, the company hasn't really performed. What it needs is scaling up, and management has been taking steps to enable that, so the shares could be an interesting turnaround play here.

Usio Inc. is a FinTech company operating in three segments. Per their IR presentation:

The shares haven't been doing well lately and there are reasons for that, despite the growth operational performance has gone south, although much of the revenue jump in 2018 was the result of the September 2017 acquisition of Singular Payments:

ChartData by YCharts


We think that the most important way for the company to improve its operational performance is to grow revenues, as rising fees in a such a competitive industry is basically a non-starter. Basically, the company has to scale up its operations. What are the ways to do that?

  • New clients
  • New products
  • Cross-selling


The company derives positive cash flow from its ACH business which was enabled when the company received the NACHA certification for Third-Party Senders in 2018.

There is growth in ACH (4% transaction growth in Q3 y/y), but this was offset by a 9% decline in return check volumes (Q3CC):

so returned checks is when we submit a ACH payment and it comes back as NSF or account closed or invalid account number. It’s actually good to have a lower volume from a risk perspective, from a revenue perspective, because we earn more on a returned transaction instead of the original transaction. It’s actually a detriment

So revenues were flat. The company is introducing new products though, in Q2 they launched RCC, its Remote Check Capture Service, allowing its ACH customers to present a check directly through the Fed, bypassing the ACH network.

The company has begun marketing this service and expects it to contribute to Q4 growth and margins, especially in the mortgage industry.


Their proprietary payments platform is central to their growth strategy, from the 2018 10-K:

The Company's strategy is to drive growth through a leveraged, one to many, distribution model in the software development marketplace. Following the completion of the Singular Payments acquisition, we launched our payment facilitation, PayFac, platform called "PayFac-in-a-Box" in late 2018 targeting partnership opportunities with app and software developers in bill-centric verticals, such as healthcare, property management, utilities and insurance verticals. The PayFac-in-a-Box platform 'integration layer' offers a simple integration experience for technology companies who are looking to monetize payments within an existing base of downstream clients. The added value of offering our integration partners access to credit card, debit card, ACH and prepaid card issuance capabilities through a single vendor partner relationship in face-to-face, mobile and virtual payment acceptance environments provides a true single channel commerce experience through an application programming interface, API.

Or, schematically, from the IR presentation:

That is, PayFac is central to the company's strategy and it has a number of characteristics:

  • It concentrates on specific verticals, ISVs or Integrated Software Vendors
  • These ISVs operate in different sectors

The company also introduces new solutions here (Q3CC, our emphasis):

We do believe there is untapped potential in serving some of Usio’s existing clients on the merchant services side. Our new corporate expense solution is able to tie in directly to the merchant accounts we offer. And this solution highlights our ability to offer an integrated card, ACH and prepaid issuing solution to help meet all of our clients’ electronic transaction processing needs.

It's fairly complex to become a PayFac provider, as explained in detail here. It's important to keep that in mind, as we argue the main hope for the company to improve is to scale up and its PayFac platform would ba a main driver in this process.

The fact that the company has incurred lots of fixed and sunk cost in order to get up and going should bode well if business picks up and transaction volumes ramp. That is exactly what seems to be happening, albeit from a small basis (Q3CC):

Heading into January of this year, we had very minimal processing volume on our PayFac platform. In the third quarter, volume was up 24% over the second quarter and 52% over the first quarter of this year. We expect this ramp up to continue into the fourth quarter and for the foreseeable future, as we have a number of new clients with scheduled implementations during the early part of 2020. For instance, we are still on track for the December launch of two sizable healthcare players, whose volume, once fully implemented, should have a significant impact on both our card processing and ACH volumes.

Apart from those two large healthcare providers, they have a pipeline of some 50 ISVs. In Q2, they had two other healthcare providers which together have 143 facilities which are now in the process of being onboarded (although some are waiting for a POS terminal).

This is the most promising development for shareholders to take on board, but since the company doesn't split out segment data it is difficult to gauge how soon and to what extent this can improve performance.

Management argues that the PayFac ramp will show up in Q4 figures and display a hockeystick like characteristic onward.

Management has also tweaked the incentives for customers to speed up the implementation, which tended to led to delays and things slipping into the next quarter with some regularity, but management sees improvements arriving.

There is also an opportunity for PayFac with existing merchants who use the company's ACH and/or card facilities, once again stressing the cross-selling opportunities.

How big these opportunities are depends on whether they're making it their only or preferred offering or just another offering. Needless to say, the company prefers the first two options.


from their IR presentation:

While the company does have a consumer facing product, its Akimbo Mastercard, it is concentrating on the B2B sector where it gets greater leverage on its sales effort. The prepaid card business is growing (Q3CC):

Card load and transaction volumes more than doubled from the third quarter a year ago. And, in fact, the comparison of any 2019 quarter with the same quarter in 2018 shows nearly 100% transaction and load volume growth.

Yet this bonanza doesn't seem to lead to much increase in revenues (Q3CC):

Revenues in our card business were up from a year ago, as transaction processing volume was up 12% and associated dollars processed were up 8%. Card revenues include the initial contribution of our proprietary payment facilitation platform, as well as our legacy card businesses.

We find these two statements hard to reconcile, to be honest. Is there a difference between transaction volume (which more than doubled) and transaction processing volume (which grew by 12%)? Given the financial data from the company and the fact that total transaction volume (for all segments) was up just 3% for the year in Q3, we focus on the second.

What is visible are the synergies between the card business and the PayFac platform. The new corporate expense solution the company developed adds to that, as it (Q3CC):

Our new corporate expense solution is able to tie in directly to the merchant accounts we offer. And this solution highlights our ability to offer an integrated card, ACH and prepaid issuing solution to help meet all of our clients’ electronic transaction processing needs.

Q3 results

From the 10-Q:

Q3 revenue growth was 10% which was a little lower than expected. The reasons for lower than expected revenue:

  • Prepaid revenue for Q3 was less than Q2, not a lot as some shifted into Q4.
  • Returned check processing, which actually is a revenue generator, was down 9%.

We were looking in vain for a split out of revenue according to the different segments. However, management did note that the growth in the first nine months exceeded the growth of any of the individual markets where the company operates, which means they are gaining market share.

But still they expected to grow faster, with 2019 growth now guided at 12%-13%, which is a little below where they hoped it would be at the outset of the year.


ChartData by YCharts

The declining trend in gross margin isn't encouraging, the 70bp y/y decline was due to (Q3CC):

increased proportion of lower-margin, credit card and prepaid margins versus the prior year.

That doesn't really say much, although management promised to split out the segments in the future. There was a big jump in SG&A from $1.5M last year to $2.1M in Q3 on the basis of increased investments in the PayFac and Prepaid segments.


ChartData by YCharts

The margin decline has also led to cash bleed, which given the cash balance at the end of Q3 of $2.6M the company cannot sustain for too long. Luckily the company is debt free. Apart from the one placement in 2017 to finance an acquisition, dilution isn't a problem:

ChartData by YCharts


ChartData by YCharts

Analyst EPS estimates are a loss of $0.36 last year falling to a loss of $0.30 this year.


The all important question is whether the company can scale up sufficiently to bend the depressing operational performance curves and boost its margins, which are very low for a FinTech company, and put a stop to the cash bleed. There are encouraging, developments:

  • While somewhat disappointing, growth is nevertheless higher than the industry.
  • Their PayFac platform is now scaling up and the first effects of that should be visible from Q4 onwards.
  • The company is adding new products and customers.
  • PayFac and new products have added significantly to the cross-selling opportunities.

Some of these are not yet established facts, most importantly, the hockeystick hasn't yet manifested itself. Investors with a large enough risk appetite might consider benefiting from this and get in early.

Less risk tolerant investors might want to wait for at least some confirmation in company results. As the company's operational performance has been on a slow but long-winded decline, we can sympathize with investors having a show-me attribute.

This article was written by

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Finding the next Roku while navigating the high-risk, high reward landscape

I'm a retired academic with three decades of experience in the financial markets.

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Finding the next Roku while navigating the high-risk, high reward landscape.

Looking to find small companies with multi-bagger potential whilst mitigating the risks through a portfolio approach.


Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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