Paysign - Earnings Call - Q3 2019

Transcript

Speaker 0

Greetings, and welcome to the PaySign's Third Quarter twenty nineteen Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. This presentation may include forward looking statements.

To the extent that the information presented in this presentation discusses financial projections, information and expectations about the company's business plans, results of operations, returns on equity markets or otherwise make statements about future events, such statements are forward looking. Such forward looking statements can be identified by the use of the words such as should, may, intends, anticipates, believes, estimates, projects, forecasts, expects, plans, and proposes. Although the company believes that the expectations reflected in these forward looking statements are based on reasonable assumptions, there are a number of risks and uncertainties that could cause actual results to differ materially from such forward looking statements. You're urged to carefully review and consider any cautionary statements and other disclosures, including the statements made under the heading Risk Factors and elsewhere in our 2018 Form 10 ks. Forward looking statements speak only as of the date of the document in which they are contained, and the company does not undertake any duty to update any forward looking statements except as may be required by law.

This presentation also includes adjusted EBITDA, a non GAAP financial measure that is not prepared in accordance with nor an alternative to financial measures prepared in accordance with US generally accepted accounting principles, GAAP. In addition, adjusted EBITDA is not based on any standardized methodology prescribed by GAAP and is not necessarily comparable to similarly titled measures presented by other companies. It's now my pleasure to introduce your host, CEO of PaySign, Mr. Marc Newcomer. Please go ahead, sir.

Speaker 1

Thank you, Kevin, and good afternoon, everyone. On behalf of PaySign, I'd like to welcome you to our third quarter twenty nineteen earnings call. I'm Marc Newcomer, Chief Executive Officer here at Pason. I will provide a brief review of the highlights for the third quarter and will reinforce our strategic direction. Following my remarks, I'll turn it over to our Chief Financial Officer, Marc Attinger to take us through the third quarter results.

Following Mark's review, we will then field your questions. PaySign is both a vertically integrated processor and a prepaid card program manager. We develop customized and innovative payment solutions in support of corporate, consumer and government programs. To learn more about our history and the services we provide and to review a copy of our recent investor presentation, you may want to visit the Investors section of our website at www.paysign.com. I am very excited to share the results for an outstanding quarter.

We experienced record revenue and earnings. We continue to execute on our growth strategy and have gone live with our premier card rolling this out to our cardholders at one of our plasma clients. Year to date, we have added 54 new card programs, 45 in plasma, seven in pharma, and two other corporate incentive programs. As expected, all scheduled plasma centers were onboarded at the September, increasing the total number of centers we service by 13%. As of September 30, there were 2,860,000 cardholders on our platform.

In summary, revenues were a record $9,000,000 an increase of 40% compared to the prior year. Net income was $3,000,000 also a record and up 270%. And adjusted EBITDA was $3,300,000 an increase of 124%. We've continued to experience excellent growth and expect to see higher revenue in the fourth quarter, benefiting from recently onboarded new card programs. Guidance remains 35,000,000 to $37,000,000 and adjusted EBITDA of $10,000,000 to $12,000,000 Strategically and consistent with our prior communications, we will continue to broaden and diversify our market focus for our prepaid card programs and will seek to introduce new products.

We are evaluating the expansion of our premier card offering to other corporate incentive industry verticals. Lastly, we are making considerable progress in evaluating several opportunities on the M and A front. However, there is nothing definitive to share at this time. As I've previously shared as I've shared previously, we will selectively pursue acquisition candidates that have long standing reputations, corporate culture of innovation and that have demonstrated growth and profitability. At this time, I'd like to turn it over to Mark to take us through the numbers in a little more detail.

Speaker 2

Excellent. Thanks, Mark. So I'm going to take us through the third quarter and the year to date top line numbers and provide some variance commentary. Any references to year on year improvements or percentage changes, unless stated otherwise, refers to the third quarter ending September 3039, as compared to third quarter twenty eighteen. Revenue for the quarter ended September 3039, was $9,008,117 an increase of 40.3% compared to the analyst consensus estimate of $8,980,000 and the prior year of 6,421,003 and $96,000,000 This increase in revenue was attributable to continued growth in plasma programs and our new pharma business, which represents approximately 22% of the revenue for the current quarter.

Revenue for the nine months was 24,901 thousand $678 an increase of 50.4% year on year compared to 16,558,438. Gross profit increased 76.3% to $5,400,000 or 59.6% of revenues compared to 3,000,000 forty seven 0.4% of revenue in 2018. The twelve sixteen basis point improvement was primarily driven by a favorable mix towards higher margin card programs. The operating expenses were $3,100,000 down from $3,400,000 the prior quarter and compared to $2,300,000 in 2018. The quarter three year on year increase consisted primarily of $300,000 in incremental salaries and benefits, dollars 300,000.0 in increased stock based compensation and a $100,000 increase in outside professional services.

Benefiting from higher cash balances, interest income was $114,000 compared to $37,000 the prior year. Net income for the third quarter ended September 3039 was $2,960,078 or $06 per basic share, an increase of 269.6 compared to $808.62 or $02 per basic share the prior year. Fully diluted was $05 versus $02 For the first nine months, net income was $5,570,540 or $0.12 per share per basic share, excuse me, an increase of 186.3% compared to $1,945,425 or $04 per basic share the prior year. For the nine month period, fully diluted earnings per share was $0.10 versus $04 the prior year. Non GAAP adjusted EBITDA was 3,252,332 or $07 per basic share, an increase of 123.6% compared to $1,454,002.24 or $03 per basic share the prior year.

Furthermore, the adjusted EBITDA margin improved to 36.1%, up thirteen forty six basis points from 22.6 in the 2018. For the nine month period, adjusted EBITDA was 7,563,004 and $86 or $0.16 per basic share, an increase of 123.1% compared to $3,000,398.33 or $07 per basic share the prior year. We loaded two $10,000,000 to the car for the quarter versus $172,000,000 the prior quarter, excuse me, compared to 172,000,000 same quarter the prior year. And our revenue conversion rate of gross dollar volume loaded on cards was 4.29% or four twenty nine bps compared to 3.72% or three seventy two bps the prior year. Worth noting and reflecting the new business onboarded in the third quarter in October, 88,000,000 were loaded to the card compared to an average per month in Q3 of just $70,000,000 loaded to cards.

From a balance sheet perspective, consolidated cash, including restricted cash, has increased 30.2 or $9,600,000 to $41,200,000 compared to $31,700,000 at year end 2018. As a comparison, consolidated cash at October month end was $49,800,000 up $8,600,000 from September. Working capital increased to $13,100,000 compared to $9,500,000 at June 3039, and compared to $5,900,000 at year end. The $7,200,000 improvement compared to last year was due primarily to increased consolidated cash, but also due to increased AR from higher client billings and decreases in accounts payable, partially offset by an increase in the card funding liability. Our liquidity, as measured by adjusting the current ratio, excluding restricted cash and cardholder funds from both sides of the balance sheet respectively, was 7.5%, up from 5.4% at year end.

As we look to the fourth quarter, we do expect benefit from revenue contributed from the recently onboarded and signed new business. Also considering the mix, we expect slightly lower gross margins. And I believe that concludes my remarks. At this time, I'll turn it back over to our moderator to begin a question and answer session.

Speaker 3

Thank you.

Speaker 0

Thank you. We'll now be conducting a question and answer session. Our first question today is coming from Mark Palmer from BTIG. Your line is now live.

Speaker 4

Yes. Thank you very much.

Speaker 5

Question on the restricted cash balance, declined sequentially from the second quarter. It had been, I guess, 42,600,000.0. It was $33,200,000 at September 30. I know that from our conversations after the second quarter, investors are not supposed to look at this as indicative of the health of the pharma co pay business. But if you could just give some commentary on what happened sequentially and what investors should take from that, please?

Speaker 2

Yes. Thanks, Mark. Appreciate the question. Good to hear your voice. So one of the things we did point to is an increase in restricted cash and consolidated cash as of October month end.

It increased by $9,600,000 or excuse me, $8,600,000 back up to $49,800,000 from the quarter end. I know you like to look at that number. It is a good number on trend over time. The other thing I would point to is that we did sign new clients in the Pharma space. And as we've talked about before, this particular product provides funds to assist patients and consumers with their out of pocket expense on their prescriptions.

And early in the year for any given program, typically these programs load more. So there is a seasonality to it. Once their deductible is met, the loads start to subside, and then you'll see those loads go right back up in the first quarter. So part of this is normal seasonality. Part of this is timing, which is why we wanted to point to the October month end restricted cash.

And part of this, we have actually new clients coming on board in the pharma space. That's probably the best way to answer it is timing and new clients and seasonality.

Speaker 5

Okay. So just to confirm, in terms of the $49,800,000 that's a consolidated cash number at the

Speaker 3

October?

Speaker 5

And I just wanted to see what the restricted cash number was at the October.

Speaker 2

Yeah. Don't have the actually, I can before we get to the end, I'll see if I can pull it up. I don't have it handy at this very moment. But the restricted cash is roughly of that 49,000,000 it's going to be roughly $42,000,000 of that is restricted. I'll check that number to confirm it.

Speaker 5

Okay. Very good. And also, just wanted to see, with regard to the PaySign Premier program, if there's any initial indication of traction being gained, in on the go live, that you have with the one client? And I'll get back in the queue.

Speaker 2

Yes. So we've certainly signing up new customers, but it's too early. And we do point to and have continued to reiterate that the material benefit from that program we expect to be in 2020. But we are making good progress.

Speaker 0

Our next question is coming from Alston Moldow from Canaccord Genuity.

Speaker 4

Hi. Thanks for taking my questions. First, a quick housekeeping question. I'm not sure if I missed it or not, but what was the pharma revenue contribution in the quarter? And then the follow-up would be, can you give some color or context to your pharma pipeline in terms of customers and campaigns and how you feel about those relationships yielding revenue next year?

Yes.

Speaker 2

Good question. Thanks, Austin. So pharma represented approximately 22% of the revenue for the quarter, and that was up from approximately 20% in the second quarter, as you may recall. And so and picking up a little bit on Mark's question, pharma continues to be a strength for us and continues to grow nicely. And Austin, to that latter part of your question, yes, we have signed new business in the third quarter.

I think Mark mentioned that we signed four new programs on the pharma business this year in the actual third quarter. And those three of those are regular prepaid, as we see in the revenue. The other is actually a co pay pharma program. In terms of the pipeline, yes, there's several new opportunities that we're evaluating and in discussions with our clients on. And as you know, we work through channel partners who have introduced us to a number of programs.

Speaker 4

Great. And then my last question is, can you talk about what you're seeing in the plasma space in terms of competition? I know the batch that you just brought on, was that something you you won from a a competitor? And as you, you know, expand your your market share, are you able to tap into any new relationships? Or is it is it mostly expanding, within, you know, larger networks where you already have, you know, a small footprint or something?

Speaker 1

No. Our expansion, in in the plasma space is due to several factors. But primarily, there's always the new center build. We're expanding by that method. And then there is winning business from our competitors.

And yes, we were successful on the what was it March, 34 centers. Those were directly across from the customers.

Speaker 2

Yes. 32 centers that we brought across on September 30, basically from with an existing client, something that we had been hoping to secure earlier in the year, as you probably know.

Speaker 1

But yeah, that was a win from another customer I mean

Speaker 2

another competitor. That's correct. So one of the things that we've shared with you is a couple of our larger clients actually split our volume between us and our largest competitor. And so we continue to look to differentiate in our performance to win new business and increase our share of those two clients. And to Mark's point, that's this is exactly that example.

Speaker 4

Got it. Thanks very much for taking my questions.

Speaker 2

Absolutely.

Speaker 0

Our next question today is coming from John Hickman from Ladenburg Thalmann. Your line is now live.

Speaker 6

Hi. Thanks for taking my call. Did you maybe I missed it, but could you tell me what the cash flow from operations was this quarter?

Speaker 2

Yeah, John. I'll have to get back with you on that. I don't have that handy.

Speaker 3

Oh, okay. So I

Speaker 6

didn't miss it. So then could you talk a little bit more about why the the revenue conversion was up?

Speaker 3

I mean, it's almost 50 basis points.

Speaker 2

Yeah. So the the typically, the revenue conversion rate on the pharma business is higher. And so that higher mix towards pharma results in a higher composite than the quarter.

Speaker 0

Our next question is coming from Eric Wright from BW Investments.

Speaker 7

Thanks, guys. First off, congratulations on the the record quarter and and consistent results and and also the the launch of the new premier card. I know lots of questions have been covered, but I I know, obviously, margins have been increasing substantially these days, and a large portion of that is attributed to the product mix. But is there any other factors that is causing the margins to increase this much? And I see also that, I mean, operating expense in Q2 twenty nineteen versus to Q3 twenty nineteen actually decreased.

So can you also comment on that?

Speaker 2

Yes, good question. On the margins, we will see that taper a little bit on the gross margin in the fourth quarter as you see those new plasma centers come on board and run at that rate that we kind of saw last year on that gross margin for the plasma business. That will bring it down on a consolidated basis a little bit, not too much of a move, but just keep that in mind. From an operating expense standpoint, most of that was timing of expenses that we were getting taken care of on the getting through our audits, getting through our outside professional services and recognizing the expense for some four zero one expenses, things that hit in the second quarter that we didn't have in the third quarter. So I just want to I would expect the fourth quarter for our operating expenses to come back up a little bit, be a little bit closer to what they were in the second quarter.

Speaker 7

Okay. That's great. And then if we're trying to gauge in terms of sort of operating leverage, I mean, do you guys have the capabilities that you guys need to continue to execute on this growth trajectory that you guys are doing? And sort of how variable is that operating expense line?

Speaker 2

Yes. It's a great question. And one of the things we've continued to talk about with all of you analysts and on these calls is that we are seeing improvements in our operating leverage. If you look at last year, year on year, the growth in OpEx was about 80%. This year, we're in about the mid-thirty percentile range on a year to date basis.

And so we do not expect that to grow at the same rate that we have our revenues growing. So we should get better and better margins.

Speaker 7

Okay. That's great.

Speaker 2

Thanks a lot, Mark.

Speaker 0

Thank you. Our next question today is coming from Jeff Feinberg from Feinberg Investments. Your line is now live.

Speaker 3

Thank you very much. Nice job, guys. I just wanna make sure it looked to me like you did meet the consensus revenue. I think you mentioned in the prepared call, what was that coming in? I know we did a little over 9.

Speaker 2

Looks like it was 8,980,000.00 is what we saw on a couple of sites that took the composite of the four analysts that cover us.

Speaker 3

Yep. That's what I got to. Okay. Great. With regard to the margin profile, a couple of people have asked about it.

I like to look at it this way. The incremental EBITDA margin this particular quarter was 70%, dollars $0.07 0 every dollar dropped through. And for the nine months, it's 50%. Can you provide a little perspective with the mix shifting towards the higher margin businesses over time, PaySign, Premier and the other opportunities, how we can think about incremental margins for next year?

Speaker 2

Yes, that's a good question. Let me just kind of glance over at the models and take a quick look at it. I mean I think that we will see probably things settle in that 60% range on a gross margin basis. We've got to get a better read on exactly how well we're seeing conversion on the Premier card. And there's a number of factors in the Premier card that affect the gross margin on that product, so we're going get some learnings on that.

We have a number of new pharma programs that just went live. We'll want to see how those perform. We have a really good read, obviously, on plasma. And then we're also looking at some other corporate incentives programs that we'll need to factor in as well. So there's a number of dynamics here.

But I think probably on a go forward basis, at least into 2020, as Premier Card comes on, kind of a tweener between the Pharma gross margin and the Plasma gross margin, I think you'll see it at around 60%. I don't think you'll see that level in the fourth quarter. And again, I don't believe we'll be at 59.6% of whatever it was this quarter.

Speaker 3

But I'm referring to the incremental EBITDA margins. I understand completely on the gross margin. But for every dollar of revenue, this particular quarter, 70¢ flew flowed through to the EBITDA. For the nine months, it's 50. It sounds like the way to think about it next year is that the incremental EBITDA should probably be somewhere in between, maybe 60% or so.

So if, hypothetically, the analysts are right, and you grow to $60,000,000 in revenue, up from $35,000,000 $25,000,000 incremental revenue, dollars 15,000,000 or so that would flow through. Is that the way to think about it?

Speaker 2

Yes. I think that's fair. I mean if you look at our full year EBITDA margins this year, right, we're looking at on adjusted EBITDA, we're looking at a full year that's at least through the third quarter, we did 36%. We'll see that taper in the fourth quarter and finish probably closer to 30% on a full year basis. So when you look to next year, that still looks like a reasonably good composite on a full year basis.

Speaker 3

Pretty exciting. If I do the math, it gets us to mid-20s in EBITDA next year. I really appreciate the time. Thank you.

Speaker 2

You bet.

Speaker 0

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further or closing comments.

Speaker 2

Thanks, Kevin. Again, we're very pleased with this quarter and with our progress overall, and we continue to focus on building a world class payments company. We appreciate you listening and for participating in this up this update, and have yourselves an outstanding week.

Speaker 0

Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.