Please note, this event is being recorded. I would now like to turn the conference over to Michael White, Senior Vice President and Chief Accounting Officer. Please go ahead, sir.
Thank you, operator, and thank you everyone for joining our call today. Welcome to Usio's third fiscal quarter 2026 conference call. The earnings release, which we issued today after the market closed, is available on our website at usio.com under the Investor Relations tab. On this call with me today are Louis Hoch, our Chairman and CEO, and Greg Carter, Executive Vice President of Payment Acceptance and Chief Revenue Officer. In addition, Jerry Uffner, Senior Vice President and Head of Card Issuing, will be available during the question-and-answer session. Let me remind our listeners that certain statements made during the call today constitute forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended and more fully discussed in our press release and in our filings with the SEC.
Following our prepared remarks, there will be a question-and-answer session for those who are registered as a financial professional. Before I turn the call over to Greg and Louis, I want to highlight why this quarter represents an important step in Usio's financial progression. Third quarter revenue rose 12% and gross profit grew 18%, while adjusted EBITDA increased 222% to approximately $1.2 million. Adjusted EBITDA margins expanded to 5% from 1.7% a year ago. This growth is also reaching GAAP results. Operating income improved approximately $743,000 year-over-year, and we achieved our third consecutive quarter of positive GAAP net income. These are meaningful signs of improving profitability. Revenue increased across all four business lines for the first time this year, led by double-digit growth in Card and Output Solutions, while Card Issuing returned to growth. Our diversified customer base provides resilience.
No single customer represented more than 10% of consolidated revenue during the first nine months of 2026. Revenue for the first nine months increased 15%, supporting our full-year revenue growth guidance of 14%-16%. Processing activity also reached new highs. We processed approximately $2.7 billion of payments in Q3, up 25%, while total transactions grew approximately 27%. Consolidated gross margins rose to 24.1% from 23% a year ago, an approximately 110 basis point improvement. Output Solutions made a meaningful contribution as investments in production capacity and automation are translating into higher segment gross profit and margin. Interest revenue associated with customer balances totaled approximately $358,000, compared with $343,000 a year ago. Louis will discuss how Usio Ion is expected to expand this opportunity over time. Our cost discipline is particularly visible below gross profit.
Total SG&A cost, including stock-based compensation and depreciation, increased only approximately $125,000, or 2%, compared with 12% revenue growth. Core SG&A rose just 1%. For the first nine months, total SG&A was approximately $200,000 lower year-over-year, while GAAP operating income improved nearly $2 million to $881,000. This demonstrates operating leverage. On approximately $2.6 million of incremental third quarter revenue, we generated approximately $817,000 of additional adjusted EBITDA, an incremental conversion rate of about 32%. That rate can vary with mix and investment timing, but it shows the earnings potential of putting more volume across our existing infrastructure. For the first nine months of 2026, adjusted EBITDA reached approximately $3.1 million, more than double the approximately $1.5 million generated in the comparable 2025 period.
Year-to-date adjusted EBITDA has already exceeded the amount generated in all of 2025, positioning us for a record full-year result. Importantly, this improvement in profitability is also reflected in our GAAP results. In the third quarter, we achieved a $632,000 year-over-year improvement in net income, moving from a net loss of $415,000 last year to a positive net income of $217,000 this quarter. Even more significant, through the first nine months of 2026, we delivered a $1.6 million improvement in net income, swinging from a loss of approximately $1 million last year to a profit of $620,000 this year. This marks our third consecutive quarter of GAAP profitability and reinforces that our revenue growth and operating leverage are translating into meaningful bottom-line results.
Operating cash flow more than doubled to approximately $3.3 million for the first nine months of 2026, an increase of 133%, despite the prior year period benefiting from nearly $1.5 million in employee retention credit collections. Over the first three quarters of the year, we invested approximately $2.9 million in property and equipment and capitalized software development, both to expand our productive capacity as well as to advance Usio Ion. At September 30th, cash and cash equivalents totaled $7.3 million, an increase of nearly $900,000 from June 30th. With only $1.5 million in outstanding equipment debt, we continue to maintain a strong balance sheet and significant financial flexibility to support our growth initiatives. Together, these results demonstrate profitable growth and a strong foundation for the opportunities ahead. Now, I would like to turn the call over to Greg Carter.
Thank you, Michael, and good afternoon, everyone. Card revenue rose 18% to a third quarter record of approximately $8.7 million, with transactions up 17% and processing dollars up 7%. PayFac revenue grew 29% and represented roughly 75% of card revenue. We also saw improved attrition in our legacy portfolio. Our established software partners continue onboarding merchants, while existing merchants increase activity. Acquiring merchants grew more than 60%, with a similar growth profile in processing merchants. As a reminder, a single software relationship can bring us a growing base of downstream merchants without separately acquiring each one. This partner-led approach is also helping us develop larger, more specialized opportunities. For example, our successful implementation of the Filtered Spend program, focused primarily on smaller bodegas, is generating interest from other similar organizations.
Our FSA payments acceptance solution lets merchants accept FSA cards across the full range of eligible SKUs, whereas closed-loop programs, such as a Medicare Advantage, cover only a limited set of eligible products. We are also expanding relationships with fintech partners that can integrate Usio's capabilities alongside their own technology. These relationships can create multiple routes to processing volume, including opportunities to offer more than one of our payment products to the same partner. Seasonally active customer programs, such as county tax payments, should support Q4 processing volumes, like in previous years. Throughout the third quarter, our sales and implementation teams focused on developing additional pipeline opportunities and advancing software integration opportunities that can generate recurring processing activity as they go live and scale. Looking toward 2027, we have a pipeline of potential fintech integrations, including opportunities to support partners that need additional processing capacity or functionality.
As these opportunities progress from development to implementation and live activity, they can broaden the base of revenue generated on our platform. Usio One continues to assist expansion with existing relationships. We recently added payment acceptance for a tax assessor that uses our print and mail services, an example of cross-selling that adds value and can improve retention. Card Issuing remains on track for a strong full year, supported by continued PayFac momentum, expansion within established software partnerships, and a pipeline of opportunities that will contribute in 2027 as implementations mature. Now, I would like to turn the call over to our Chief Executive Officer, Louis Hoch.
Thank you, Greg. Our results demonstrate the operating leverage we have been working to build. Gross profit is growing faster than revenue, while the costs of supporting that growth are increasing at a much slower pace. The result is improving GAAP operating income, adjusted EBITDA margins, and cash generation, all while we continue to invest in our platform. Two catalysts stand out as we look to our next phase of growth: Usio Ion, which can deepen our customer relationships and expand our service offering, and our new relationship with Harris Computer, which creates another path into utility and government customers. Both represent growth opportunities on top of our existing organic growth over the long term, potentially starting as soon as next year. We introduced a live initial version of Usio Ion in the third quarter.
It combines business account functionality with our corporate and expense management capabilities, and it's designed to integrate more closely with the broader Usio payment platform. The next important step is enabling customers to settle processing funds into Usio Ion accessible through this ecosystem, rather than transferring settlements to external bank accounts. Today, we earn interest on certain customer balances held in the ordinary course of processing. We believe broader Ion account adoption will allow us to retain more eligible customer balances and create additional interest revenue and opportunities for cross-selling. Based upon our internal assessment, we believe the opportunity to capture additional customer deposits could reach several hundred million dollars. Harris Computer has selected Usio as a preferred payment provider and print and mail capabilities for relevant utility and government software customers.
This creates a potential distribution channel into a large and established base of institutions whose billing and payment needs align with our strengths. The opportunity is compelling because we can support both physical and electronic billing, as well accept payments through virtually all payment channels. At the same time, we recognize that utilities often have lengthy procurement, integration, and conversion cycles. We are focused on implementation milestones and converting partner introductions into live revenue-producing customers. In short, we see a clear distinction between the earnings improvement already visible in our financial statements and the opportunities we are building for the future. ACH and complementary service delivered a sixth consecutive quarter of record E-check transaction activity. E-check transactions increased 39%. ACH dollars processed grew 26%, and return check transactions rose 44%, while the reported revenue in this category grew 9%.
That difference reflects a broader revenue category, tiered pricing for established customers, and a product mix. Our Nacha third-party sender certification further supports our position in complex payments. Card Issuing returned to a positive year-over-year revenue growth of approximately 1% in the third quarter, following pressure on the revenue earlier this year. Card loads volumes increased 6%, and purchase volumes increased 17% as compared to the prior year quarter. We also continued to build on our implementation base. 15 new clients were signed, 16 card programs launched during the quarter, and more than 20 implemented programs in various stages of scaling. Card Issuing is focused on converting these launches into sustained purchase activity and revenue over the coming quarters. Our Card Issuing pipeline includes additional programs with a key fintech partner, opportunities to expand volume with existing customers, and emerging relationship with a prominent regional bank in the issuing space.
We are prioritizing these conversion of these opportunities into live reoccurring activity, with pace and magnitude of contributions remain dependent on execution and customer adoption. We continue to support government and education disbursements. Over the past 12 months, we've facilitated approximately $1.3 billion in school voucher disbursements across 37 states, primarily through ACH, with five of these programs are set up for Card Issuing capabilities. We continue to evaluate our additional opportunities to expand school voucher disbursements, building on our existing relationships and proven capabilities in this market. In a separate higher education program, one university is live using our Consumer Choice technology for Title IV refunds, with another 23 universities in the pipeline. Our Consumer Choice technology is designed to let students, benefit recipients, and other payees from multiple disbursement methods, including ACH, real-time payments, virtual and physical cards, physical checks, and other supported digital payment options.
This flexibility allows an organization to work with a single platform while giving the ultimate recipient more options. Output Solutions demonstrates how targeted capacity investments can translate into improved economics. Q3 revenue grew 14%, while gross margins significantly expanded. We mailed 5.8 million pieces, up 7%, and delivered 25.5 million electronic documents, up 28%. That combination of volume, production improvements, and pricing contributed to our overall improvement in operating leverage. During the quarter, Output Solutions added four cities and two utility customers. We are also better positioned to serve larger clients because of our new ultra-high-speed printer, which became operational in the second quarter. With its expanded capacity and improved throughput, we believe that we are better positioned to serve larger clients. The business already supports hundreds of utility customers, which gives our Harris relationship a meaningful operational foundation.
We remain financially positioned to pursue a wide range of growth opportunities. With $7.3 million in cash, limited equipment debt, and positive operating cash generation, we can selectively invest in products and partnerships. To summarize, we are delivering double-digit revenue growth, translating that growth into improved profitability, generating positive cash flow, and investing in capabilities that position us for even greater opportunities ahead. As we look in towards 2027, we are particularly excited about two significant growth catalysts, Usio Ion and our strategic partnership with Harris. Ion represents an opportunity to expand our banking and settlement capabilities, capture additional customer deposits, and generate incremental 100% margin and interest revenue. Meanwhile, our Harris partnership opens the door to a substantial new market of utility and government customers, where we believe our integrated payment facilitation and Output Solutions offerings provide a compelling value proposition.
Combined with organic growth and our existing business lines, we believe these opportunities position Usio to accelerate growth, further expand margins, and generate meaningful long-term value for our shareholders. We reiterate our 2026 revenue growth guidance of 14%-16% and expect record adjusted EBITDA for the year. I want to thank the Usio employees for their continued dedication and commitment to our growing business, strengthening our company, and creating long-term value for our shareholders. Operator, you can now open the call for questions.
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Again, it is star then one to ask a question. At this time, we will pause momentarily to assemble our roster. The first question comes from Barry Sine with Litchfield. Please go ahead.
Hey. Good afternoon, gentlemen.
Hey, Barry.
Congratulations on the quarter. I mean, really tremendous progress in terms of margins. It seems to me you have surpassed the point now where your revenue is covering all your fixed costs, and from here on out, we should see continued progress. Could you talk about to what extent your existing systems can support additional revenue? For example, you are closing in on $100 million in annual revenue probably over the next year. If you got to $200 million, could your system support that? Would you need additional spend? How leverageable is this model as revenue continues to grow?
Well, Barry, we are definitely seeing operating leverage at work. We can add significant capacity to our systems. Obviously, we would add some more servers in the cloud, but the leverage is here, and when it comes to payments, we can add a lot. When it comes to print and mail, we have significant capacity as well, but we probably could not double our capacity there today.
In terms of the As that happened, what is the, just directionally, the outlook for margins? How much do you think you can increase margins? You have already, this quarter, already demonstrated tremendous margin expansion. It seems to me, as revenue continues to grow, there is a lot of upside in terms of EBITDA margin expansion potential.
Yeah. The big catalyst for margin expansion is Usio Ion, and as we earn interest off our customers' deposits, that just flows through to the bottom line. We are really excited about Usio Ion, which hopefully we will start using Ion to settle our customers' funds in the near future. Usio Ion today is live for corporate expense programs. You can actually go to usioion.com and sign up for a corporate expense program with the ability to issue multiple cards and expense management and bill payment. But the big milestone for Ion is when we start settling funds, customer funds from their payments to Ion, and that is when you will see margins expand.
Okay. Shifting gears, you had very strong growth in all of your product lines, and the one that I think is very interesting is prepaid. If my model is right, you have seen declining year-over-year revenue for the last 10 quarters, so that is a tremendous turnaround, and just not declining is very additive to consolidated growth. What is the outlook now that you have stabilized that business? I think revenue was up 1% year-over-year. Can we get that business back to growth? Can we get it back to double-digit growth?
It is definitely going to grow, and we will let Jerry talk here in a second, but the implementation queue, deals that we have already signed, is large. New partners that we have brought on, which includes a significant, very large regional bank that works a lot in government card programs, is live now, but we do not have any programs boarded yet, but we will. The opportunities are great within prepaid. Also, the comps, previous year comps, no longer include Six Flags, which a reseller lost that deal in 2025. You got anything to add, Jerry?
No, you hit the nail on the head. I mean, we have been focusing on adding new clients, but we have been really focusing on larger material deals, and we have secured several and are in the process of implementing. Louis mentioned the large regional bank, which I have taken a lot of time to add, and then we have another fintech partnership that we have been adding. We have two programs live there that are beginning to do live traffic and start to scale. So, there is upside for there, and that will also help contribute to the margin expansion because we have higher margins on the prepaid side.
You know, Barry, also we are experiencing record growth in our ACH operation, and October was very promising as well for ACH. ACH continues to grow, and obviously, that is our highest margin business, which helps our overall mix.
Okay. Those are my questions. Thank you.
Thank you, Barry.
Again, if you have a question, please press star then one. The next question comes from Jon Hickman with Ladenburg. Please go ahead.
Hey, quick question about margins. Can you elaborate more on when you expect to be able to start settling funds with Usio? Is that a first quarter, second quarter of 2027?
It's something we're being very careful with.
What are you guys anticipating?
Yeah, it's something we're being very careful with, Jon. We're not at the point where we'll mandate it to our customer base. We hope to get to that soon. But this quarter, we're selecting one of our friendly customers that will help us through the process, and we'll start settling for them, and we'll fine-tune the final features of Usio Ion, hopefully to get us to the point where we can start adding at least groups of customers in the first quarter.
Okay. And then, I do not know who answers this question, but what is the integration timeline with Harris? Can you start integrating?
Yeah, Harris is a very exciting catalyst for Usio. The industries that they serve, utility and government, are slow-moving industries. Harris in themselves, the way that they are organized, which has multiple companies working with Usio that support multiple platforms within utilities and government, makes it complex for Usio. The good news about Harris is any of their customers, one implementation moves the needle for Usio. If Usio has one or two implementations next year, that would be great. If Usio exceeds that, Usio is going to be ecstatic. But it is definitely a relationship that, and the industries that Usio serves, they serve, that will move slower than Usio wants it to.
Okay. So if you got two or three, you would be ecstatic next year. That probably would not happen till the back half, right?
I do not know, Jon. I just know that when they have utilities that support 1 million or even 2 million customers-
Yeah
we are talking about payment volumes that are half of what we do today. One of those utilities could actually increase our volumes 50%-60%. It does not take a lot in terms of the implementations.
Okay. Could I ask a question about, you said that you were already dealing with on the school vouchers. You said for the last 12 months, you have done $1.3 billion in volume?
That is correct, and it all went out ACH, and it is a part of the reason why we are experiencing ACH growth. We have not seen any of the school voucher programs that are set up for cards put money on cards yet. In fact, in that group of five, I am not even sure if any of them are implemented yet. If they put money on cards, that will be very exciting for Usio and will be a lot of revenue.
The school voucher, it does not just hit at the beginning of each semester? You are getting payments or you are getting volume continually every month?
Yeah. No, it's reoccurring throughout the school year. I mean, as you can imagine, students move from one school to the other, and so the states don't hand out the money in advance. They're handing it out over time.
Okay. Is the start of each semester, is that typically a bigger, like a seasonality thing or not?
Well, we've seen it continuous for this year in the ACH volumes, but starting school years, depending on each state program's specifics, how they implement, could be a boost. But
Well, I guess what I'm asking is, did you see an uptick in September?
Yeah. Well, yeah, we saw uptick in the beginning of the school year, but I mean, that was also when some of them implemented. We don't have enough data yet to tell you if there's any seasonality. We can just tell you that that volume continues to grow for Usio.
Okay. One last one. Without Usio Ion kicking in, have you kind of reached the limit of your gross margins?
Well, our gross margins are always based upon the mix of our products. Obviously, ACH has the highest margin, and pinless debit is second, and Card Issuing is third, and Output Solutions, which grew margins 5% this quarter, is the fourth. The fifth is payment facilitation, because we have to pay out interchange, and we also share revenue with our ISVs. It really depends on which product or division kind of has the most growth that quarter, how it affects margins.
Okay.
Yeah.
Thank you.
Usio Ion is going to be a big deal for us.
Okay. Thanks.
Thanks. Thanks, Jon.
Again, if you have a question, please press star then one. This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.