In the quarterly multipage letter to investors from Triumph Financial CEO Aaron Graft, improved financial performance at the company’s open-loop payment network went side by side with weaker numbers in its factoring business that would be expected in the middle of a freight recession.
Triumph (NASDAQ: TFIN) management has said repeatedly that the two most important numbers at TriumphPay were earnings before interest, taxes, depreciation and amortization and the number of transactions on its network, which it defines as TriumphPay clients that use payments, audits or “both products in some capacity in their operations.”
The EBITDA margin at TriumphPay was negative 15% for the third quarter. It was negative 55% in the second quarter and negative 66% in the first quarter. The final quarter of 2022 showed a negative margin of 114%.
“We are closing in on our EBITDA-positive goal which we have committed to achieve on or before the end of 2024,” Graft said in his letter. “It is worth highlighting once again that these positive results at TriumphPay were generated within a freight market that was relatively flat.”
As for volume, TriumphPay processed just over 5 million invoices in the third quarter, up from 4.52 million invoices in the second quarter, a gain of 10.4%.
But that is all invoices processed, which includes the legacy fast pay business that was at the core of TriumphPay’s activities before a vast increase in its scope with the 2021 acquisition of HubTran.
For the network, which is defined as the use of “conforming transactions” that are serviced by all of TriumphPay’s capabilities including audit, network invoice volume soared to 303,300, up from 181,904 one quarter earlier.
“Of all the important metrics, I would call investors attention to network transaction growth,” Graft said. “They are the heart of the network and the most profitable thing we do in TriumphPay.”
The significant increase did not come just from higher volume, Graft said, adding “that was part of it.”
“It was also the result of improving our technology stack to widen the funnel for network transactions,” Graft said. That allowed brokers to use audit-only services at TriumphPay, even if they were not using the payment capabilities of the network.
TriumphPay has frequently noted that growth in getting brokers onto its network is not a quick process. Graft noted in his letter to investors that shifting ownership and broker startups and closures also can give an incomplete picture of TriumphPay’s network penetration, one of the reasons he said volume should be looked at as a top indicator of performance.
But penetration into the largest brokers remains a key metric for TriumphPay. Graft’s letter included graphics that said of the brokers that are “currently live or contracted to go live” on the TriumphPay network, the company has signed up 53 of the top 100 brokers, six of the top 10 and two of the top five. The measurement for those classifications is the amount of freight spend transacted by the companies.
The Graft letter highlighted that it added the brokerage division of Knight-Swift and Bridgeway, a stand-alone 3PL, as new customers to the network during the quarter. Graft said also there will be an as-yet unidentified top 5 broker to be added in the coming quarter.
As for factoring, the original trucking business at Triumph Financial, Graft’s discussion of that unit’s performance combined metrics with his views of where the freight market is headed.
The average transportation invoice size factored by Triumph Financial was $1,772, down $1 from the prior quarter. But as Graft noted in his letter, the figure includes diesel fuel costs. The average Department of Energy/Energy Information Administration weekly retail diesel price was $4.24 in the third quarter and $3.93 in the second, so that the percentage of linehaul costs covered in each invoice would have been less in the third quarter than in the preceding three months.
In the third quarter of 2022, the average transportation invoice factored by Triumph was $2,073. One potential sign of improvement: The average transportation invoice factored by Triumph in October so far rose to $1,828.
But Graft’s forecast on the freight market was not bullish, and it led him to say of the higher October invoice number that “it remains to be seen whether these rates will hold.”
TriumphPay saw an unspecified increase in the number of invoices per client and average daily purchases, but “total active client counts” were lower.
“We believe the market is decreasing in total carrier count with many smaller carriers failing or migrating to larger carriers,” Graft said. “I believe this will continue until we see a sustained turn in the freight market.”
His bearish outlook included these observations: “Without an increase in spot rates, more trucking companies will fail or leave the system. I am surprised that the credit cycle has not advanced more quickly, although headlines in the last few days suggest it may now have arrived,” a possible reference to the shutdown of Convoy Inc.
As “capacity leaves the system,” Graft said, Triumph will face “pressure on revenue versus credit losses.” But given how rapidly invoices enter and leave the factoring system, “the biggest headwinds are lower invoice prices, lower utilization and client attrition.”
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