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Edited Transcript of PYDS earnings conference call or presentation 15-May-18 9:00pm GMT

Q1 2018 Payment Data Systems Inc Earnings Call

San Antonio Jun 19, 2018 (Thomson StreetEvents) -- Edited Transcript of Payment Data Systems Inc earnings conference call or presentation Tuesday, May 15, 2018 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Marco

CORE IR - IR

* Louis A. Hoch

Payment Data Systems, Inc. - Co-Founder, Vice-Chairman, President, CEO & COO

* Lowell Thomas Jewell

Payment Data Systems, Inc. - Senior VP & CFO

* Vaden C. Landers

Payment Data Systems, Inc. - Executive VP & Chief Revenue Officer

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Conference Call Participants

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* Brian Kinstlinger

Alliance Global Partners - Analyst

* Adam Grant

- Shareholder

* Ronald Nesser

- Private Investor

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Payment Data Systems earning conference call for the first quarter ended March 31, 2018. (Operator Instructions) Participants of this call are advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. A replay of the call will be available approximately 1 hour after the end of this call through May 29, 2018.

I would now like to turn the conference over to John Marco, Managing Director of CORE IR, the company's Investor Relations firm. Please go ahead, sir.

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John Marco, CORE IR - IR [2]

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Thank you, Brian, and welcome to Payment Data Systems First Quarter 2018 Financial Results Conference Call. The earnings release, which Payment Data issued earlier this afternoon, is available on the company's Investor Relations website at paymentdata.com/invest, under News. On the call today are Louis Hoch, President and CEO; Vaden Landers, EVP and Chief Revenue Officer; Tom Jewell, Senior Vice President and Chief Financial Officer; and Houston Frost, Senior Vice President of prepaid services. Management will provide prepared remarks, and then we will open the call to your questions.

Before we begin, please remember that comments on today's call include forward-looking statements. Forward-looking statements can be identified by the use of such words as estimate, anticipate, expect, believe, intend, may, will, should, seek, approximate or plan or the negative of these words and phrases or similar words and phrases. Forward-looking statements, by their nature, involve estimates, projections, goals, forecasts and assumptions and are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements, including risks related to the integration of the recently acquired Singular assets; the realization of the anticipated opportunities from the proposed Singular acquisition; management of the company's growth; the loss of key resellers; the relationships with the Automated Clearing House Network, bank sponsors, third-party card processing providers and merchants; the loss of key personnel; growing competition in the electronic commerce market; the security of the company's software, hardware and information; and compliance with complex federal, state and local laws and regulations.

These forward-looking statements speak only as the date -- as of the date of this conference call and should not be relied upon as predictions of future events. Payment Data expressly disclaims any obligations or undertaking to update or revise any forward-looking statements made today to reflect any change in Payment Data's expectations with regard thereto or any other changes in events, conditions or circumstances on which any such statements are based, except as required by law. Please refer to the company's SEC filings on its Investor Relations website for additional information.

With that, it's my pleasure to turn the call over to Louis. Louis?

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Louis A. Hoch, Payment Data Systems, Inc. - Co-Founder, Vice-Chairman, President, CEO & COO [3]

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Thank you, John, and thank you, everyone, for joining us on the call today. First, I want to welcome Mr. Vaden Landers, our Chief Revenue Officer, as a management participant on this call. He will have prepared remarks, and he will be a participant on all of our future calls.

I'm happy to report that our company's revenue growth plan is yielding great results, and we are pleased to report a strong first quarter. Revenues for the first quarter were $5.8 million, an increase of 108% over the first quarter of 2017 and was our largest revenue-generating quarter in the history of our company. We expect this trend to continue throughout 2018.

Our credit and debit card processing benefit -- business benefited greatly from the Singular acquisition, and we also experienced organic growth through our core lines of businesses. Credit card transactions increased 307% in the first quarter as compared to the same time period in 2017, and credit card dollars processed increased 305% as compared to the same time period in 2017. I want to take this opportunity to point out these are our highest quarterly levels of credit and debit card processing volumes in the history of the company -- in the 20-year history of the company.

While our electronic check transaction volumes during the first quarter of 2018 were down 2% and our returned check transactions were down 2% as compared to the same time period in 2017, they increased 5% and 6% sequentially over the fourth quarter of 2017 and marks the third quarter of sequential growth. We expect this positive trend to continue throughout 2018. Total dollars processed during the first quarter exceeded $782 million.

Finally, I want to spend some time discussing the outlook for the remainder of 2018. As I previously stated, our growth plans are yielding great results. We expect to continue to set records for credit and debit processing throughout 2018. We believe that the growth in our credit and debit card processing, combined with our sequential growth in electronic check processing, will cause us to experience resulting revenues that we expect to break new records for annual revenue in 2018. We remain focused on continuing our plans for both organic and growth through acquisitions. We remain committed to building a secure payment processing service that will attract new customers and new relationships with software integrators that are focused on various industry segments.

With that, I'd like to conclude my opening remarks and turn the call over to Tom Jewell, our Chief Financial Officer, to discuss our financial results in more detail. Tom?

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Lowell Thomas Jewell, Payment Data Systems, Inc. - Senior VP & CFO [4]

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Thanks, Louis, and good afternoon, everyone. I'd like to take a quick review of our financial results for the first quarter, and then I'll turn the call back over to Vaden for his prepared remarks, and we can to open the call up for questions.

Revenues for the quarter ended March 31, 2018, increased 108% to $5.8 million, as compared to $2.8 million for the quarter ended March 31, 2017. The increase for the quarter was primarily due to the acquisition of the business of Singular Payments, LLC in September of 2017, plus core organic growth, as Louis mentioned.

Gross margin dollars in the first quarter were $1.3 million or 21.7% of revenues compared to $0.9 million or 33.5% of revenues in the first quarter of 2017. We are pleased with the increase in gross margin dollars. As you may be aware, margin percentages are lower on the credit card processing dollars and reflects the lower margin percentage year for Q1 of 2018 versus Q1 of 2017.

Our adjusted EBITDA in the first quarter of 2018 was a loss of $0.2 million compared to positive adjusted EBITDA of $0.1 million in the first quarter of 2017. The key driver of the decrease in adjusted EBITDA is in the investment of incremental sales-related expenses being incurred to drive future revenues.

The net loss for the first quarter of 2018 was $1.05 million or a negative $0.09 per basic and diluted share compared to a net loss of $0.3 million or negative $0.03 per basic and diluted share for the first quarter of 2017. The key drivers in incremental loss versus the prior year is the addition of $0.3 million of amortization expense associated with the acquisition of the business of Singular Payments; $0.2 million of incremental stock-based -- which I want to specify as noncash compensation expense; and higher employee and employee benefit cost incurred to drive the revenue growth that we're pursuing.

Operating expenses, including cost of goods sold, were $6.9 million for the first quarter of 2018 versus $3.1 million during the first quarter of 2017. The increase includes higher processing cost associated with incremental business acquired from Singular Payments, the higher stock-based compensation and expenses mentioned previously, and the amortization expense associated with the Singular Payments acquisition.

As of March 31, 2018, we had $3.5 million in cash and cash equivalents, as compared to $4.8 million in cash and cash equivalents at December 31, 2017. The decrease in cash was primarily due to $239,000 of net funds used in operations for the period and $956,134 of treasury stock purchases to cover director, officer and employee taxes associated with the January 9, 2018, stock vesting. Related to the treasury stock purchase, we had a stock option that vested January 9, 2018. Our stock buyback plan allows our officers, directors and employees to sell shares, as authorized in advance by the Board of Directors, to cover the taxes on the stock grant. Looking forward, we do not have another large grant until 2022 that would require the use of stock buyback plan in this quantity.

Again, I want to affirm the company has no debt. As we stated earlier, total dollars processed for the first quarter of 2018 exceeded $782 million. The resulting revenue stream contributed $5.8 million of revenues and $1.3 million of gross margin dollars.

And with that, I'll now turn the call over to Vaden to discuss efforts underway to continue our record-breaking revenue growth. Vaden?

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Vaden C. Landers, Payment Data Systems, Inc. - Executive VP & Chief Revenue Officer [5]

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Thank you, Tom. During the first quarter, we reached a critical juncture in our business as we completed and launched our new Payfac in a Box platform in February, followed by boarding our first batch of merchant customers. This initiated the process of debugging and certifying the end-to-end enrollment and activation of new accounts; authorization capture and settlement of transactions; and ultimately, statement generation and recording of all processing activity on the platform. This is a significant milestone in our growth and operating strategy after having spent the last couple of years investing in the product architecture and build-out of the technology that will power and support our growing pipeline of customers.

Our company is now in a position to begin to scale with greatly increased system capacity. To that end, with the launch of our Payfac platform in Q1, our focus on integrated payments and payment enablement of software systems has intensified. We are continuing to build and work a growing pipeline of integrated software vendors, commonly referred to as ISVs; have had a number of recent wins; and are finalizing integrations with partners previously announced, such as PracticeSuite, a medical billing software system serving more than 41,000 health care professionals; and Sigmund Software, a leading provider of enterprise software solutions for behavioral health, social service and addiction treatment centers nationwide. The impact of the implementation of these customers and others, we believe, will produce solid organic growth in the back half of 2018.

Our business development team is focused on 3 primary verticals, including health care, property management and utilities. We think that these sectors will always be minimally affected by upward or downward movements in the economy and produce healthy, growing and resilient revenue streams for years to come. We will also be open-minded as we look to diversify into other markets as situations present themselves. Furthermore, we continue to look opportunistically at acquisitions that are both accretive and strategic in terms of either expanding our distribution capabilities or providing for further differentiation.

In other areas, our ACH business is a very stable part of our revenue story and represents an exciting growth opportunity for the company. We are in the process of negotiating deals that will extend our reach into a few new verticals, such as law firms, accounting software, franchise groups and nonprofits. We also continue to make good progress in ongoing discussions with retailers, who have the potential to rapidly expand distribution within a number of these new verticals.

In our FiCentive business, our senior leadership team has been making great progress and has recently completed agreements with a number of new prepaid clients that we will be announcing in the next few weeks, along with other exciting developments in the prepaid business, all of which will contribute to significant growth in this channel.

In our credit card processing business, as Tom alluded to earlier, much of the growth we reported in this quarter has come from the addition of the legacy book of business that was acquired as part of the Singular acquisition in September of 2017. As the year progresses, we have planned a number of revenue optimization initiatives, along with sales and marketing campaigns, that will be geared towards the cross-sell of ACH and prepaid into the existing portfolio of former Singular customers. This customer base is mainly comprised of health care providers in the dental, optometry and general medicine specialties. In furtherance of those initiatives, we plan to expand our Tennessee-based inside sales team in support of these and other customer acquisition and activation activities in both that legacy book of business as well as the Payfac channel.

Finally, in the first quarter, we announced the opening of our new payment headquarters just outside of Nashville, Tennessee. The location is strategically important as it gives us the ability to leverage the deep talent pool of payment professionals in the area and to place ourselves geographically in what is considered to be the center of the health care universe.

At this time, we'd like to open up the call to questions. As a reminder, in addition to Tom, Louis and myself, we also have Houston Frost, our Senior Vice President of Corporate and Prepaid Development, on the line to assist in answering your questions. Operator, please poll the audience.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question today comes from [Adam Grant], a shareholder.

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Adam Grant, - Shareholder [2]

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I noticed that there has been no mention of profitability. The top line has been increasing tremendously. Are you able to give us any kind of hint of when we're going to turn that other corner?

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Louis A. Hoch, Payment Data Systems, Inc. - Co-Founder, Vice-Chairman, President, CEO & COO [3]

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Mr. Grant, this is Louis Hoch. We actually had negative cash flow this quarter, and we're going to take care of that in a very short order. A lot of the negative cash flow occurred due to onetime events that occurred this quarter. As for profitability, we've got a lot of depreciation and stock expense to cover before we get there. And those are noncash items. So in terms of cash flow, they don't affect us. But we want to quickly return to cash flow positive, which you'll see in a short order. Profitability will follow.

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Adam Grant, - Shareholder [4]

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So within 2019, are you looking to turn the corner?

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Louis A. Hoch, Payment Data Systems, Inc. - Co-Founder, Vice-Chairman, President, CEO & COO [5]

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We haven't publicly come out and said when we're going to reach profitability, but cash flow positive will happen in short order.

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Operator [6]

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The next question comes from [Ronald Nesser], a private investor.

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Ronald Nesser, - Private Investor [7]

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If called upon, could Payment Data Service -- Systems adopt artificial intelligence and face recognition payment technology in the future? That's the first question. You can ponder that. Second question, I'd like to find out if Patent 7,021,530 of Payment Data Systems is still under that umbrella, protective umbrella? And I'd like to compliment you on the offices. I understand that you now have 5 of them, and most of them are in low-tax states, which I think will benefit Payment Data Systems in the seeable future. That's the only questions I have. I'll sit back and listen to what you have to say.

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Louis A. Hoch, Payment Data Systems, Inc. - Co-Founder, Vice-Chairman, President, CEO & COO [8]

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Ron, regarding AI, we will work with our hardware vendors. We can support it now using our technology, but as for the front end, the capture, face recognition or biometrics, that would not be us. That would be a hardware vendor. And we work with a number of them today that have on their road map to initiate biometrics or artificial intelligence type of payments. As for the patent, we still hold a perpetual license to use that patent, and we use that every day in our prepaid world. And did you have a third question?

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Ronald Nesser, - Private Investor [9]

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Well, yes, I do. Besides complementing you on the office locations, I've listened in on the BBC who interviewed some Chinese, high-tech people in China, and they're using NFC, near field communication, but they prefer -- the millennials prefer face recognition. So that's the reason I brought up the subject about face recognition payment technology. I think that -- well, I know that China's ahead of us and we need to play catch-up. So that being said, I'd like to know that you're focused on face recognition if you're called upon to adopt it.

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Louis A. Hoch, Payment Data Systems, Inc. - Co-Founder, Vice-Chairman, President, CEO & COO [10]

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Yes. Definitely, we're working with hardware vendors. And if they support it, our back end will support it.

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Ronald Nesser, - Private Investor [11]

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Yes, sir. You've been in the business since 1998. So I know you're doing something right or you wouldn't be here. And I want to thank you again for all your feedback and wish you all the best.

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Louis A. Hoch, Payment Data Systems, Inc. - Co-Founder, Vice-Chairman, President, CEO & COO [12]

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Thank you, Ron.

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Operator [13]

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The next question comes from Brian Kinstlinger with Alliance Global Partners.

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Brian Kinstlinger, Alliance Global Partners - Analyst [14]

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I joined a little bit late. One of the questions I had was maybe to understand a little bit better, with the Singular acquisition, what that's translated to in terms of your health care business, in terms of pipeline, closing deals and growing volumes in that business.

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Louis A. Hoch, Payment Data Systems, Inc. - Co-Founder, Vice-Chairman, President, CEO & COO [15]

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Sure, Brian. Vaden's on the call. He'll be glad to answer that for you.

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Vaden C. Landers, Payment Data Systems, Inc. - Executive VP & Chief Revenue Officer [16]

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Brian, thanks for the question. So the Singular business, the legacy book of business is primarily composed of -- or comprised of smaller health care providers in the dental, optometry, veterinary and other sort of specialties. And so we built that portfolio on a one-to-one basis, meaning we were going out, knocking on doors, leveraging relationships to try to acquire those customers. And the sort of new strategy and how this business really begins to scale and what's really making it an interesting story is our new Payfac platform and the ability to board hundreds or thousands of accounts at a time for an ISV in the health care sector or within the utility sector or the property management sector, where we're really focused on developing opportunities today, and to be able to leverage the platform that we've invested in and built and rolled out in February to really -- and scale from this point going forward.

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Brian Kinstlinger, Alliance Global Partners - Analyst [17]

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And so when do you think that health care business will begin to scale, where it will become -- growing much faster than the total business? Is that already happening? Or do we see that happening 6 to 9 months from now?

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Vaden C. Landers, Payment Data Systems, Inc. - Executive VP & Chief Revenue Officer [18]

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Well, as I mentioned earlier in my comments, we spent most of the last 2 years, a year before the acquisition was completed and really the 8.5-or-so months since the acquisition was done on September 1, really getting the platform launched so that we could start to leverage it in a meaningful way. And I referenced two of the press releases that we had done on a couple of the more significant practice management software solution that have integrated to our platform already who have just sort of been waiting on us patiently to get this platform ready to the launch on a large scale.

So again, PracticeSuite is a health care services platform for -- they have about 41,000 health care professionals that use that platform within their business today. So we are focused on how do we monetize those opportunities in very short order. And another one that I mentioned was Sigmund Software, which is a behavioral medicine, addiction treatment center platform that is leveraged by some larger -- sort of midsize to larger clinics that we have boarded a couple to date and are ready start moving forward with the boarding of the balance of those customers and are working with the client to sort of strategize and develop a plan to do that.

So I do expect that, as I said, in the back half of 2018, we'll begin to see some of the fruits of our labors as it relates to the business development efforts as well as the platform build-out that everyone on the team has spent a lot of time and effort getting ready.

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Brian Kinstlinger, Alliance Global Partners - Analyst [19]

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Great. My last question is, I know it's been a short period of time since you got your NACHA certification, and I know now there's 4 of you who have that. Have you already started to see the benefits in terms of being invited to bid on more work or getting through the process faster or stronger win rates? Are there any early successes? Or will that take a little bit longer to materialize for you guys?

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Louis A. Hoch, Payment Data Systems, Inc. - Co-Founder, Vice-Chairman, President, CEO & COO [20]

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We're definitely winning more business because of it. But more importantly, we have partnerships that have reached out to us, banking partners that now want to do business with us. And quite frankly, they don't want to do business with anybody else that's not NACHA certified. And out of those 4 people that have certified, there's no one like us, or none of those companies are our real competitors. So there's some really nice names in that group, and we're proud to be part of that group.

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Operator [21]

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At this time, this will conclude the question-and-answer session for today. I'd like to turn the conference back over to Louis Hoch for any closing remarks.

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Louis A. Hoch, Payment Data Systems, Inc. - Co-Founder, Vice-Chairman, President, CEO & COO [22]

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I just want to say thank you for everybody joining and I look forward to talking to you next quarter.

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Operator [23]

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The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.