Marvelous Microcaps
Usio, Inc. (USIO)
INTRO:
At Perritt Capital Management, we take focused positions in companies where we have a high conviction in their success; companies that are out of the mainstream of small cap investing. To highlight our process, we are pleased to present the newest installment in our ongoing series “Marvelous Microcaps – Big Ideas on Small Companies.” This series profiles companies that we believe have a niche in their existing markets or are launching a product that could disrupt their marketplace.
THE COMPANY:
Usio, Inc. (USIO) is an electronic payments processor and FinTech company with a full stack of proprietary and integrated cloud-based payment and financial solutions for merchants, banks, governments, service bureaus, and credit card issuers. They operate in four divisions: ACH payments, credit card processing/payment facilitation, pre-paid card services, and output solutions.
Their ACH (Automated Clearing House) business accounts for 19% of their revenues as of the last quarter. The company had previously been the ACH processor for the failed cryptocurrency broker Voyageur Digital, which saw revenues from that segment jump significantly during the boom in interest in the currency only to disappear entirely when Voyageur went bankrupt in June of 2022. This sudden loss of their largest customer led to a period of readjustment from the company as the ACH segment experienced double digit percentage declines in revenue for the next few quarters. They recently eclipsed the one-year anniversary of this loss, and we believe year-over-year comps should be sustainably positive going forward.
Credit card processing recently accounted for 33.4% of their revenues. Usio’s processing services are used by customers through third party relationships with vendors that sell payment systems. Usio works to sign up these vendors, targeting those with strong customer relationships and long-term contracts. For example, they recently signed up a vendor that provides credit card payment systems to various toll roads across several governmental entities.
Prepaid cards recently accounted for 24.5% of revenues. Prepaid’s share of revenues was higher than usual during the previous quarter, as they receive a portion of unused card balances that expire as the related stimulus programs end. Due to this timing, some of this bump in revenue is temporary, however, their success in running these programs has helped Usio to sign up additional government programs and they are establishing themselves as one of the go-to providers of pre-paid cards for guaranteed income programs. They also are managing the prepaid, reloadable cards for the new iteration of MoviePass which is just getting off the ground. As part of this program, Usio will earn a processing fee of 4-8% for every transaction that membership card is used for.
Output solutions accounted for 22.8% of their revenues. They manage print and mailing services for various government entities both directly and through third party vendors. Their largest relationship is with Los Angeles County, CA where they manage all check processing services for fees, fines, and overpayments. During the last quarter’s report, they highlighted that they had processed over 9,000 checks in one day for LA County, demonstrating their ability to meet the needs of their largest customers.
WHY WE OWN: THE PERRITT ADVANTAGE
We purchased Usio in February of 2022 based on their diversified go-to-market approach that included several long-standing relationships. While we did not anticipate the collapse of Voyageur Digital, Usio’s diversified model proved to be a strength for the company. The loss of a top customer could easily prove fatal to many firms, but Usio was able to weather the loss, and continued to grow revenues in three of their four divisions. During this period, they announced their participation in the new MoviePass venture, they won several new customers and established new vendor relationships that brought in new long-term business such as their toll road customers. Usio was able to prove to investors that their long-standing relationships and reputation within their industry remained intact and we believe that one year out from the bankruptcy of Voyageur, that the impacts of this loss are behind them.
Usio is also positioned to benefit from long term trends in how local and state governments are implementing welfare programs. Many government entities have experimented with pilot programs around the concept of universal basic income. Prepaid cards have become a favorite delivery vehicle for these benefits payments and Usio has proven to be a dependable partner in several of these initiatives. Were these programs to move from the pilot stage to become long-term solutions for delivering government benefits payments, Usio is well positioned to become a dominant player in the space.
Usio also has a healthy financial profile. The company maintains a debt-free balance sheet aside from some small lease obligations and has maintained a cash balance of $4.5-6.5 million dollars in the past 17 months that we have owned the stock. To put it in the context of the market value of the company, around 10-15% of their value has been their cash balance. Absent changes in cash balances related to various programs they administer, Usio maintained a very modest burn of less than a million per quarter during the loss of Voyageur, and they are now generating both positive net income and cash flow. We believe the financial health of the company is a tent pole for our investment thesis as it gives them a cushion in the event any further adverse events happen.
Overall, we believe that a difficult year of adjustments is behind them and each of their four operating divisions are poised to grow in the coming years. Usio is establishing themselves as a preferred provider of payment processing services across several different programs with strong relationships in both the public and private sector. They have maintained a healthy financial profile despite the operational hardships they dealt with and are well positioned for continued growth in several areas that stand to benefit from long-term secular growth trends. We look forward to future developments and are excited about what the future holds for the company.