Triumph’s open-loop system hits a milestone, even as payments’ EBITDA loss widens

That’s the dollar amount of what had initially been called “conforming” transactions that the TriumphPay network handled in a one-year period, almost to the day. That open-loop network handles payments submitted by brokers through the systems first developed by HubTran, which Triumph Financial announced it was acquiring in April 2021. 

In his letter to shareholders, Graft noted that TriumphPay announced its first “conforming” transaction on the former HubTran network — which Triumph now simply refers to as “the network” — on Jan. 11, 2022. As Graft described it, a conforming transaction is one “where both the payor and the payee are integrated into the network such that structured data and remittance information may pass between parties digitally, which eliminates inefficiencies in the presentment, audit and payment of invoices.”

And 364 days later, on Jan. 10 of this year, the number of transactions that met that test topped $1 billion in volume.

“To go from zero to $1 billion in a year is no easy feat,” Graft wrote.

But the reality is that in the payments sector of Triumph Financial that includes the open-loop network, EBITDA deteriorated.

In the letter to shareholders, Graft noted that in a 2019 forecast, he had projected that TriumphPay would achieve profitability by the end of 2022. That did not happen; TriumphPay posted negative EBITDA of $8.3 million for the fourth quarter — significantly worse than in the prior four quarters, which also recorded red EBITDA ink in each of those periods. 

“The primary reason was our decision to pivot from a closed-loop network to an open-loop network following our acquisition of HubTran in June 2021,” Graft wrote in the letter. “Investors can do their own analysis about what we would have earned, excluding the TriumphPay earnings drag during the period, or if we had stayed the course on the original strategy, if they find that valuable. We made our call on where we wanted to drive the business. That call must encompass all the change — seen and unforeseen — along the way. I remain convinced the pivot to an open-loop was the right call for many reasons, but I also acknowledge it caused us to miss the timing of our profitability target.”

The short-term hit to profitability as a result of the focus on TriumphPay and the network was highlighted in a recent analysis by Wells Fargo, which recommended selling the stock though conceding the long-term strategy had the prospect of a strong payoff. 

Graft also supplied relevant data on what the network had processed: about 486,000 invoices involving 21 factors and 83 brokers. It involved 2.6 million “exchanges of structured data,” which Graft said in the past would have required phone calls or emails. 

“To extrapolate this efficiency gain across a ubiquitous freight payments network is to understand the transformational nature of what TriumphPay is building,” he wrote.

On the company’s third-quarter call in 2021, Graft said the concept behind the open-loop system was “proved.” He reiterated that in the shareholder letter for the fourth quarter of 2022 and said Triumph is “now on the journey to make the concept a valuable business,” according to a transcript of the call provided by Triumph Financial. 

During the earnings call with analysts, Graft said the company’s bottom line performance between its community bank and the factoring business could have led to greater total profitability but did not “because we chose to reinvest in TriumphPay.”

Triumph Financial’s primary business remains factoring and that group’s numbers saw the impact of a softer freight market. The average transportation invoice purchased by Triumph for the purposes of factoring was down 3.4% in the quarter, to $2,002 from $2,291 in the fourth quarter of 2021. The company’s factoring business also includes non-transportation factoring, but about 90% of the business is in transportation.

Triumph also purchased a reduced number of invoices, down to approximately 1.6 million invoices from 1.67 million a year earlier and 1.68 in the third quarter.

In the earnings call, Graft said factoring is “the most profitable thing we do and the most profitable thing we’ve done for a long time.” When asked about how the soft freight market might impact Triumph Financial’s earnings, Graft said a $100 move in invoice prices correlates to about $10 million of pre-tax income. 

Graft also said Triumph’s factoring business is about 15% of the entire factoring market. 

After the softer fourth quarter, Graft said there has been an improvement so far in the first quarter but “we have no idea whether that strength will continue.”

TriumphPay also processes invoices that are not “conforming,” in that they do not use the capabilities of the open loop network. That number totaled 4.6 million, down from 4.68 million in the third quarter but significantly above the slightly more than 4 million in the fourth quarter a year ago.

 In other highlights from the call:

– Graft dismissed a question that the slowdown in factoring might lead to layoffs. “To just go through and start making cuts of very talented people, you always want to cut underperformers, but to just make cuts because you’re seeing some headwinds in freight, to me, is the exact wrong thing to do,” he said. Graft added, however, that the company continues to make investment in technology to automate processes now done by employees.

– Despite the slowdown, Tim Valdez, president of the factoring division, said on the earnings call that collection times on factoring loans have not been extended out and “matter of fact, we’re seeing an improvement.”

– Yield in the factoring segment declined to 13.85%, compared to 14.42% a year ago and 14.11% in the third quarter. But payments yield at 12.53% was higher than both the corresponding quarter last year (11.61%) and the third quarter (11.33%).

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