Usio's Q3 2025: Contradictions Emerge on Sales Cycle, Gross Margins, and Implementation Control

Date of Call: None provided

Financials Results

• Revenue: Total revenues relatively unchanged year-over-year; $1.2M sequential increase led by ACH (ACH +30% YOY) and seven quarterly processing-volume records
• Gross Margin: Margins improved year-over-year, driven by growth in high-margin ACH and efficiency gains

Guidance:

• Expect a return to top-line growth in Q4 and for full-year 2025
• Card issuing comps to normalize; management expects improvement and rebound into 2026
• Overhead expected to remain stable for the balance of the year
• Anticipate continued cash growth, funding organic investment, share repurchases, and selective M&A
• Near-term profitability: another quarter of positive adjusted EBITDA and operating cash flow

Business Commentary:

• Strong Quarterly Processing Volumes and Revenue Growth:
• Usio set seven quarterly processing records, including a record quarterly overall transaction volume of $16.2 billion, up 8% year over year.
• This resulted in a $1.2 million sequential increase in revenues, led by ACH, which was up strongly from the second quarter, marking the third consecutive quarter of 30% growth from the year-ago quarter.

• The growth was driven by strong across-the-board processing volumes and a shift towards recurring revenue.

• ACH and PINLESS Debit Growth:

• Usio's ACH business saw a 30% revenue increase in the third quarter, with record volume and electronic check transactions.
• PINLESS Debit transactions also set all-time records, with growth over the same period in 2024 of 96% for transactions processed and 87% for dollars processed.

• This growth was primarily due to increased adoption in the mortgage servicing and fintech industries.

• Card Issuing and Government Opportunities:

• Despite a decline in interest income, card issuing saw sequential volume growth with total dollars loaded exceeding $75 million.
• Usio has been receiving calls from various card program opportunities related to government shutdowns, with expectations to benefit from these programs in the fourth quarter.
• The company's reputation in government and charitable markets and the potential for new healthcare customers are contributing to growth prospects.

Sentiment Analysis:

Overall Tone: Positive

• Management: "Q3 was a solid quarter...return to top-line growth in the fourth quarter and for the full year 2025." Seven processing records set; "positive adjusted EBITDA" ($368k) and $1.4M operating cash flow; cash > $7.8M; ACH strong (+30% YOY) and sequential revenue growth across business lines.

Q&A:

• Question from Scott Buck (HC Wainwright): Are sales cycles changing; can you accelerate implementations; has the federal government shutdown affected state/local business; what M&A criteria would you use; how much remains on the repurchase authorization?
  Response: Core takeaway: Pipeline is strong but the primary constraint is implementation speed, which is largely controlled by customers (UCO One helps standardize onboarding); some government-related opportunities were paused during the shutdown; M&A criteria require clear synergies, a fair purchase price, and no distracting issues; ~$3M remains on the repurchase authorization.

• Question from John Hickman (Ladenburg): What changed making ACH largely recurring now; what were the one-time items in the prior-year comp; confirmation that credit card transactions were up 75% and why revenue growth was more muted?
  Response: Core takeaway: This quarter's revenue is almost entirely recurring; last year's results included one-time items (large bankruptcy distribution and a large card/plastic order) that distorted comps; transaction growth (including PINLESS Debit) inflates counts but revenue is driven by dollars processed.

Contradiction Point 1

Sales Cycle and Implementation Timing

It involves expectations regarding the sales cycle and implementation timing, which are crucial for revenue projections and investor expectations.

Have sales cycles changed in a way that could accelerate or delay opportunities compared to historical trends? - Scott Buck (HC Wainwright)

2025Q3: The sales pipeline is strong, but the focus is on accelerating implementations rather than the sales cycle. - Louis Hoch(CEO)

Is the low vs. high revenue guidance tied to implementation timing or is it within your control? - Scott Buck (H.C. Wainwright)

2025Q2: The revenue guidance range is largely dependent on the rate of customer implementation for large accounts. - Louis Hoch(CEO)

Contradiction Point 2

Gross Margin Trends

It involves changes in financial performance, specifically regarding gross margin trends, which are critical indicators for investors.

What drove the improvement in gross margins this quarter, such as mix, efficiency gains, or other factors? - Scott Buck (HC Wainwright)

2025Q3: Gross margin improvement on the quarter is primarily driven by our ACH processing growth and efficiency gains on our PINLESS Debit initiatives and increased electronic document processing. - Louis Hoch(CEO)

Is the low vs. high revenue guidance based on implementation timing or is it within your control? - Scott Buck (H.C. Wainwright)

2025Q2: Gross margin pressures due to higher volumes of bank card processing and new clients. - Louis Hoch(CEO)

Contradiction Point 3

Control Over Implementations and Sales Cycle

It involves the company's ability to control the pace of implementations and its impact on the sales cycle, which directly affects revenue projections and investor expectations.

Do you have mechanisms to accelerate adoption, or is that beyond your control? - Scott Buck(HC Wainwright)

2025Q3: Implementation is outside of our control. We have no specific levers to quickly accelerate adoption. - Louis Hoch(CEO)

Can you discuss the sales team's composition? - Barry Sine(Litchfield Hills Research)

2025Q1: We've moved to a standardized CRM like HubSpot and we're seeing more opportunity for cross-selling. - Greg Carter(CRO)

Contradiction Point 4

Gross Margin Expectations

It involves changes in financial forecasts, specifically regarding gross margin expectations, which are critical indicators for investors.

What caused the shift to largely recurring revenue in the ACH business? - John Hickman(Ladenburg)

2025Q3: Our goal is 25% or so gross margins. - Louis Hoch(CEO)

What caused the slight year-over-year decline in gross margin? - Barry Sine(Litchfield Hills Research)

2025Q1: Interest revenue related to funds held for our customers was actually down for Q1 of 2025. - Michael White(CFO)

Contradiction Point 5

Sales Cycle and Adoption Acceleration

It involves statements regarding the control over the acceleration of client adoption and the effectiveness of initiatives aimed at streamlining this process, which could impact revenue projections and investment decisions.

Do you have levers in place to accelerate adoption, or is it outside your control? - Scott Buck (HC Wainwright)

2025Q3: Implementations are outside of the company's control, and there are no specific levers to quickly accelerate adoption. - Louis Hoch(CEO)

Are you prioritizing share repurchases over reinvesting in the business or pursuing M&A? - Scott Buck (H.C. Wainwright)

2024Q4: The implementation process is one that historically has taken between 6 to 12 months, but we have a team that is executing and doing absolutely everything they can to accelerate that process. - Louis Hoch(CEO)