Much of the data in Triumph Financial’s first-quarter earnings report is no surprise, reflecting a softer freight market that resulted in a decline in factoring volume and invoice size.
But the earnings of the trucking-focused bank and factoring company are more notable for what they say about the performance of Triumph’s (NASDAQ: TBK) payments network, which is the core of the company’s future.
Triumph uses the term “network” to refer to the combination of TriumphPay Payments, which is the quick-pay capabilities that came with the founding of TriumphPay and the audit product offering made possible by the 2021 acquisition of HubTran. That acquisition created the capability for what Triumph refers to as “conforming transactions” that utilize all the services of TriumphPay.
In an earnings call in 2022, Triumph Financial CEO Aaron Graft described a conforming transaction this way: “What makes a conforming transaction unique is that the entire process of presentment, audit, payment and cash application can be completed in an automated environment. You can think of this as the difference between pulling out a checkbook at the grocery store 30 years ago versus tapping a credit card today.”
The first-quarter results showed two things about where TriumphPay stands now: It’s moving closer toward profitability, but growth into new customers can be slow.
Overall, invoice volume at TriumphPay’s quick-pay activities was down 7.5% and total payment size declined 9.8%, dropping to just over $5 billion from $5.58 billion in the prior quarter.
But what matters to the company going forward is the aggregate total of the two, the quick-pay operations as well as TriumphPay Audit. The latter processed an annualized rate of $17 billion in invoices in the first quarter. When combined with the annualized payments rate in the quarter (roughly $5 billion), it brings the annualized revenue of the network up to $37.1 billion, Graft said.
And according to Graft, that means TriumphPay is touching more than 20% of all brokered freight in the U.S.
There were other benchmark networks that were positive.
Payment volume on the network dropped sequentially to $289.67 million from $301.37 million. Year-on-year comparisons are less revealing, given that the network ramped up so much in the last five quarters, but the payment volume on the network in the first quarter of 2022 was just $129.6 million.
But the network invoice volume rose sequentially to 159,353 from 157,004 in the fourth quarter while in the midst of a weak freight market. In his letter to investors, Graft said: “Network transaction volume increasing in a declining market is a material positive.”
The Triumph quarterly earnings report is a combination of a letter from Graft that is remarkable in the depth of its discussion, compared to standard management comment in most earnings reports, as well as an earnings call that is actually live video of Graft and several other executives speaking to the audience.
EBITDA margin at TriumphPay also improved from a weak fourth quarter. The margin is negative — it came in at negative 66% in the first quarter. But it was negative 114% in the fourth quarter of 2022.
Comparisons to a year ago look unfavorable, but that is a comparison of a TriumphPay with TriumphPay Audit in its formative days and quick pay being the overwhelming base of activity, compared to a TriumphPay that today has significantly grown the audit portion of the network.
The improvement in EBITDA in part is because of the declining impact of the network’s startup costs, Graft said on the earnings call, according to a transcript. “That upfront cost is real,” he said. “We’ve been burying that cost and that cost burns off over time.”
Growth in the network in terms of raw head count continued but slowly. TriumphPay reported 589 brokers on the network in the first quarter of 2023, compared to 580 in the fourth quarter and 584 in the third quarter. That’s growth then of just five brokers over six months.
Factoring companies using the network have been flat at 70 for the last three quarters.
In the earnings call, Graft discussed the complexities of bringing a new company onto the network.
TriumphPay has an internal standard that defines a tier 1 broker as one that handles annual volume of $500 million or more in annual transportation spending. Dan Curtis, COO of TriumphPay, said on the call that the company signed one Tier 1 broker to the TriumphAudit system during the quarter as well as several tier 2 brokers.
“Our pipeline of both tier ones and tier twos for payment audit and network remains strong,” he said, according to a transcript of the call. “We expect to bring more on in the second quarter as well as the third quarter.”
In his earnings letter, Graft called out only one new tier 1 broker to the network by name: Traffic Tech, a New York City-based company.
But the scenario laid out by Graft on how a new company is onboarded helps to explain why it can be a slow process.
Graft, on the earnings call, said TriumphPay had expected other tier 1 brokers to be on the network by this quarter but that they had “slid” to the second quarter. The relatively slow growth of tier 1 brokers on the system even as TriumphPay’s EBITDA improved is “why we’re encouraged that we’re able to grow EBITDA before even that volume comes, because it proves that we’re monetizing the network at a rate that exceeds what our original expectations were.”
Graft and other executives have long noted that growth in the network is always restricted by just how rapid it can be. “An integration with TriumphPay is difficult technology and requires a lot of resources because it’s not just something you can flip on with a switch,” he said.
If a company is using a widespread off-the-shelf transportation management system, the transition is easier, according to Graft. But for a large broker with its own custom TMS, it is a “seven-figure expense” and it could hit $2 million.
“It’s no small decision,” he said. “We do not generally bear any of that cost. That is their cost to onboard, which goes into their calculation of the long-term value proposition of the network to their operations. For smaller brokers who are on an off-the-shelf TMS, it is a much lower number and happens much quicker.”
In the factoring business at Triumph Capital, formally known as Triumph Financial Services, the average invoice price financed by the group was $1,911 in the first quarter, down $490, or 20.4%, from a year earlier and sequentially down $91 from the fourth quarter.
The purchased volumes for the group measured in dollars were down 10.7% from the fourth quarter and down 27.6% from the first quarter of 2022.
Helping to offset the difficult conditions in factoring at Triumph was an improvement in collection of past-due receivables. That number declined $32 million, “driving a material improvement in our enterprise past-due ratio from 2.53% to 1.67%,” Graft said in his letter.
Graft and other company officials have taken great pains to note that its factoring business is separate from what goes on at TriumphPay. It is aware that if factors that might use the capabilities of TriumphAudit can have that information shared by their competitors at Triumph Capital, there could be significant damage to the growth trajectory of the audit business.
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