Usio Struggles With Soft High Margin Business (NASDAQ:USIO)

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A quick look at Usio

Usio (NASDAQ:USIO) reported its third quarter 2022 financial results on November 9, 2022, beating expected earnings while missing EPS estimates.

The company offers a range of electronic payment and related data Solutions for companies worldwide.

With future macro uncertainties, unproven new customer relationships like MoviePass, flat sales, and worsening losses, my outlook for USIO is on hold.

Usio overview

Based in San Antonio, Texas, Usio was founded in 1998 to provide integrated payment processing and complementary products and services to merchants and financial institutions.

The company is led by Co-Founder, President and CEO Louis Hoch, who was previously Founder, President and CEO at Billserv and Executive Manager at Anderson Consulting.

The company’s main offerings include:

  • credit card processing

  • Direct Debit/Prepaid Processing

  • ACH processing

  • PayFac API

  • starting solutions

The company acquires customers through resellers and through direct sales efforts to government and corporate prepaid card customers.

Usio’s market & competition

According to a 2019 market research report, the global payment processing services market is expected to reach $62.3 billion by 2024.

This represents a projected CAGR of 9.9% from 2019 to 2024.

The main drivers for this expected growth are a continued increase in the number of merchants looking for integrated payment processing solutions and the emergence of new entrants with new technology offerings.

Key competing vendors include:

  • PayPal

  • Global Payments

  • square

  • Jack Henry & Associates

  • Paysafe Group

  • Nasper Limited

  • Shift4 payments

  • Other

Usio’s recent financial performance

  • Total revenue per quarter has increased in recent quarters:

9th quarter total sales

Total Earnings in Q9 (Looking for Alpha)

  • The gross profit per quarter has also grown significantly:

9th Quarter Gross Profit

9th Quarter Gross Profit (Looking for Alpha)

  • Selling, G&A expenses as a percentage of total revenue per quarter have increased as shown in the chart below:

Q9 Sales, G&A % of sales

9Q Sales, G&A % of Revenue (Looking for Alpha)

  • Quarterly operating income has slipped significantly into negative territory in recent quarters:

Ninth Quarter Operating Results

Q9 Operating Income (Looking For Alpha)

  • Earnings per share (diluted) has turned negative over the past two quarters, as shown in the chart below:

9th quarter earnings per share

9-Quarter EPS (Looking for Alpha)

(All data in the charts above is GAAP)

Over the past 12 months, USIO’s stock price is down 67.6% while the US S&P 500 index is down around 15%, as shown in the chart below:

52 week stock price

52 Week Stock Price (Looking for Alpha)

Rating and other metrics for Usio

Below is a table of relevant cap and valuation numbers for the company:

Measure [TTM]

Crowd

enterprise value/sales

0.78

sales growth rate

46.2%

Net Income Margin

-5.0%

GAAP EBITDA %

-0.4%

market capitalization

$54,410,000

Enterprise value

$52,610,000

Operating cash flow

$5,120,000

Earnings per share (fully diluted)

-$0.27

(Source – Search for Alpha)

For reference, Shift4 Payments (FOUR) would be a relevant partial public comparison; shown below is a comparison of their primary valuation metrics:

Metric [TTM]

Shift4 payments

Usio

variance

enterprise value/sales

1.87

0.78

-58.3%

sales growth rate

57.4%

46.2%

-19.4%

Net Income Margin

2.0%

-5.0%

-354.3%

Operating cash flow

$158,800,000

$5,120,000

-96.8%

(Source – Search for Alpha)

A full comparison of the two companies’ key performance indicators can be viewed here.

Commentary on Usio

In its most recent earnings call (source – Seeking Alpha), covering Q3 2022 results, management noted that transaction volume had “decreased due to the exit from the cryptocurrency market.”

The company’s previous relationship with crypto exchange Voyager ended after the exchange entered bankruptcy proceedings in July 2022.

However, management believes its ACH business, which was hardest hit by the exit from the cryptocurrency market, is “on the road to recovery…[as] the growth of our high-value, high-margin return checks remained on a steep path.’

As for financial results, revenue for the quarter grew just 4% year over year, with the company’s Output Solutions segment growing the fastest at 32% year over year due to cross-selling success.

Management has not disclosed retention rate metrics.

Gross profit was lower year-over-year, as was gross margin, reflecting a product mix shift away from the high-margin ACH business.

SG&A expenses increased 30% year over year, while operating losses and loss per share deteriorated significantly from the same quarter of 2021.

On balance sheet, the Company ended the quarter with $5.1 million in cash and cash equivalents and $0.1 million in debt.

For the trailing twelve months, free cash flow was $3.9 million, of which $1.2 million was from investments.

Looking ahead, management sees growth potential in its relationship with a newly launched MoviePass, the subscription cinema-going company.

Recently, however, two former executives, including the CEO, of the previous version of MoviePass were indicted by the US Department of Justice for fraud related to statements made to previous investors in the predecessor company.

In terms of valuation, the market currently values ​​an enterprise value/revenue multiple of 0.78x, less than half that of larger competitor Shift4 Payments.

The main risk to the company’s prospects is slowing macroeconomic conditions leading to reduced payment activity, with many economists predicting a full-blown US recession in 2023.

With future macro uncertainties, unproven new customer relationships like MoviePass, flat sales, and worsening losses, my outlook for USIO is on hold.

source

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