Earnings Call Transcript - TFIN Q2 2024

Operator, Operator

Good morning. It's 9:30 in Dallas, so let's get started. We'd like to open by thanking you for your interest in Triumph Financial and for joining us this morning to discuss our second-quarter results. With that, let's get to business. Aaron's letter last evening discussed the quarter's results and the investments we are making in a few projects that we believe will create long-term shareholder value. We are excited about the opportunities we see to lift an industry and create a network that delivers tangible benefits to all participants while improving transparency and creating value for America's truckers. As you'll see this morning, Todd will not be joining us. Todd is never afraid to get in the trenches and leave during difficult market conditions. However, today he is recovering from Achilles tendon surgery after being reminded that pickleball is not a contact sport. We wish him well on a speedy recovery and expect to welcome him back to the earnings call in Q3. That quarterly shareholder letter published last evening and our quarterly results will form the basis of our call today. However, before we get started, I would like to remind you that this conversation may include forward-looking statements. Those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The Company undertakes no obligation to publicly revise any forward-looking statement. For details, please refer to the safe harbor statement in our shareholder letter published last evening. All comments made during today's call are subject to that safe harbor statement. With that, I'd like to turn the call over to Aaron for a welcome and to kick off our Q&A.

Aaron Graft, CEO

Thanks, Luke, and thank you all for joining us this morning. I have just a few comments before opening it up for questions. The big story this quarter is our progress in building density. Our network engagement stands at just under 47% as we sit here today. With the signing of C.H. Robinson and with ArcBest, a Top 20 broker going live during the quarter, we have a sight line to achieving critical mass related to our network density, and monetization is what follows density. This is the way it works in network economies. We have a tremendous amount of momentum right now. Now that's what we see on the horizon. And while our eyes are on the horizon, it is not lost on me that we live in the present. And for the present, our earnings are under pressure for the reasons I wrote about in the letter. There are some things we can control and some that we cannot control. In choosing our path forward, we have focused mainly on creating long-term value at the expense of improving short-term results. That is why we continue to invest at a time when I think most people might slow down or become defensive. Now, taken to an extreme, that view can be cavalier. We do not want to be cavalier. Instead, we want to be intentional. And we think an appropriate guardrail to our aspirational growth is fixing our expenses at approximately $97 million per quarter going forward. This allows us some room to make additional technology investments to deliver on our promises to our customers and our prospects, and it forces us to be disciplined about our talent management. This is healthy for us and it will enhance our profitability both in the short term and the long term. In closing, the stakes are high. We are building a network that connects many to many to many in a very large market. Those opportunities are hard to find and even harder to execute on when you find them. The rewards for those who win make the effort absolutely worth it. Those are my opening thoughts. Now, let's turn the call over for questions.

Operator, Operator

We will now proceed to the Q&A session. Our first question is from Tim Switzer from KBW. Please go ahead.

Tim Switzer, Analyst

Hey, good morning. Thanks for taking my question. Certainly, I wish Todd the best on recovering from the Achilles injury. The first question I have is the revenue growth in the TPay segment has been chunky historically and it was above 50% year-over-year the last three quarters, but it slowed down a bit this quarter. What needs to happen for us to see an acceleration in revenue there? And is it simply an end-through session, more brokers or factories on the network, more revenue-generating invoices? Can you guys kind of walk us through that?

Melissa Forman, CFO

You just nailed it. It's those three things. And so certainly the transportation recession is creating an issue for short-term earnings. But as you've seen, Triumph is growing through those headwinds. And so while we've had payment volume growth and network engagement growth, we've also had expense growth. And one thing I want to point out is that our expense growth quarter-over-quarter, while it was just under 6%, our year-over-year growth for the same quarter was 40%. And you're seeing a lot of that happen on the fee side. So the majority of that is in our fee growth, which is where we think is the most important part of the network that we can control to be able to remove as much market volatility as we can. And so we're seeing that growth happen there, continue to reprice customers, as we've talked about in the past, certainly as we bring on new customers, are using our new pricing models. And in that you're seeing those changes happen in the mix of our revenue.

Tim Switzer, Analyst

Okay. And my follow-up there is about the increases you've seen on generating more revenue from your invoices. It went from a little under 22% to a little over 22% this quarter, and you made more progress year-over-year. Now, what strategies are you guys implementing to, I guess, become more effective at being able to charge and what are some of the challenges you're seeing on doing that?

Melissa Forman, CFO

Yes, that's a great question. So the difficulty in building this network is the connectivity, right. And that's where we feel like we're building ammo. And so it's taking network-enabled transactions and connecting them to the factor on the other side so that they can see that value come from the network. And so you've seen us grow the network transactions pretty substantially quarter-over-quarter. This one, it slowed down a little bit at a 13% growth, but that's because it gets harder and harder the bigger you get, right, the bigger your denominator, the percentage changes. And so what has to happen though is when I have a transaction that is on a broker side that's network-enabled and I'm connecting it to a factor, it's not just saying the factor is enabled and the broker is enabled, it's making sure those two relationships can connect because every factoring management system is different. And so when you start to build density and those connections is when the monetization can start and we're building that now. We're building that foundation. When you think about where we're at from a factors perspective, who's on the network, about 21% to 22% of their portfolio now is being connected through the network. We continue to work on that and ensure that whatever's available on the broker side is usable and consumable on the factor side and that's where the real value of the network comes into play.

Aaron Graft, CEO

Yes, Melissa answered that well. I want to add that this is a valid question, and it relates to why things often progress slowly before they really take off. If we genuinely believe what we've created is superior, why isn't it gaining traction more quickly? The challenge lies in the resistance to change; change is difficult in personal lives as well as in corporations. For example, when credit cards were first introduced to retailers, they faced skepticism about using plastic. Initially, there was confusion about how this would bring efficiency or benefits. However, as connections are made, the speed of acceptance increases because people begin to see the advantages of the change. Our current phase, which involves building density and relationships within the network, needs to address the reluctance to shift from established methods. Bringing in new partners like C.H. Robinson and ArcBest and achieving over 50% volume will help overcome this resistance to change as the economic benefits become clear. What Melissa and the team are doing is impressive, and it’s important to keep making consistent progress, step by step. Eventually, we will look back and realize how much we have accomplished, even if it doesn’t always feel significant on a quarterly basis.

Tim Switzer, Analyst

Okay. I appreciate it. If I could squeeze in one more. I know this might be an impossible question to answer, but what's that threshold of density that you need to, where you really start to see the exponential effect of, I guess it's really network effects here that we're talking about? Do you guys have any idea of when that occurs?

Aaron Graft, CEO

Yes, I mean, that's a great question. What we've said is we expect to cross over 50% by the end of this year. We're at 47% now, that doesn't include any of the Robinson volumes. It doesn't include a lot of the volume from people who are already on. So, long term, what we've said historically, I don't know if I've ever been precise about it, but we can be precise here. I think we'll get to 80% density. And I said 2024 and 2025 are our years to continue to build density. Does that mean exactly that on December 31 of 2025, we're at 80%? No, I can't answer that. But I can see the pathway forward, if that's true, somewhere between 50% and 80%, the factoring companies who are the ones who I think benefit the most from the economies of scale on their side of the transaction start to see more than half of their transactions come through with the opportunity to connect to the network, and they can start to adjust their staffing models to recognize the efficiencies. So there's no magical number, but I think it's somewhere between half and the ultimate penetration of 80%, because it's impossible to ever say you're going to get that long tail of the last 20%. And that's why I opened the letter saying 2024 and 2025 are the density building time. And monetization should still grow, like we're growing revenue. I'm not asking for permission not to grow revenue, I'm asking investors to understand that being the first mover, that window is open and we need to get to that density threshold between 50% and 80% in order to be able to change this industry and deliver value to our constituents. So that's not a precise answer, that's a band and that's where we think it is.

Tim Switzer, Analyst

Got it. Yes, I appreciate the details that really helpful. I'll get back in the queue.

Operator, Operator

Our next question comes from Gary Tenner from D.A. Davidson & Co. Please go ahead.

Gary Tenner, Analyst

Thanks. Good morning. I wanted to ask about the conforming volume. It continues to increase as a percentage of total volume in the payments segment. It's kind of maybe slowed from the pace of growth, I think, Melissa, as you pointed out, maybe 13% this quarter. As you think about C.H. Robinson coming live, let's say second quarter 2025 is kind of a full quarter run rate, just for sake of argument, but what do you think the addition of C.H. Robinson and their volume does in terms of pulling up the conforming penetration rate, if you will kind of out of the gate?

Melissa Forman, CFO

I will address that from a specific angle. When you consider their total volume and distribute it across all factors in the factoring industry, the percentages will shift because they must connect to the network. For a network-enabled and connected factoring company, C.H. Robinson's volume typically accounts for 20% to 25%, and sometimes even more, of their overall purchase volume. This represents a significant portion of their daily operations, and currently, they have to perform those validations manually. Therefore, the ability to validate and manage cash applications through the network for an additional 20% to 25% of their portfolio is quite significant.

Gary Tenner, Analyst

Thank you. Regarding factoring as a service, could you explain what it entails and how it will benefit TPay as it develops?

Aaron Graft, CEO

Yes, Tim will address the operational aspects since he is the expert in that area, and afterwards, I will provide my financial perspective. Please proceed, Tim.

Tim Valdez, Operational Expert

So, Gary, it's important to note that factoring as a service allows our potential customers to leverage our technology, platform, and expertise to create different products and ultimately enhance their technology. We have noticed several trends, particularly that the factoring industry, especially FMS providers, has not kept pace with technological advancements. By investing in instant purchase and other initiatives within our focus area, we are setting higher standards and providing opportunities for factors or anyone involved in originating factoring transactions to utilize our operational capabilities. Imagine integrating factoring as a service with instant purchase and LoadPay; this combination offers significant advantages for factors, enabling them to make quick funding decisions and operate on a 24/7 basis. This is especially crucial during holiday seasons. For instance, a carrier needing funds for repairs may have valuable paper in their truck that can be converted into cash. Therefore, factoring as a service serves as an essential tool for carriers to access the funds they require when they need them. There are multiple ways in which factoring as a service enhances value for factors.

Aaron Graft, CEO

Yes, on the financial side, every action we take must ultimately benefit our shareholders. We're not involved in experimental projects. When we consider that transportation is a $2 billion revenue industry, we need to look at the profitability and operational efficiency of factors while excluding the sales aspect, as we don't aim to sell all factoring services. Other firms can effectively engage with customers of various sizes without our involvement. However, once a factor purchases an invoice, this initiates a process that includes underwriting, cash collection, cash application, and various validations and verifications. These processes are highly repetitive and cannot be automated. We estimate that in this $2 billion industry, factors incur between $500 million to $600 million in back-office costs associated with processing invoices and applying payments. We want to increase the efficiency of factors and believe there's significant friction in these transactions, with back-office costs ranging between $5 and $10. This cost is lower for large customers due to bulk purchases of invoices and higher for small carriers requiring more assistance. By connecting with TriumphPay and digitizing the process, we can enhance efficiency. However, if factoring companies rely on outdated technology incapable of processing this data effectively, they will miss out on potential efficiencies. This is why we're reaching out to the industry; we are providing a data feed from brokers and aim to manage 80% of all truckload brokered transactions. We encourage factors to align with this data to make quicker decisions, minimize inefficiencies, and improve document clarity. Unfortunately, many current technology providers are not meeting these needs. If they won't, we need to address this issue ourselves and expect compensation for doing so. We aim to reduce the $500 million to $600 million in expenses associated with traditional factoring processes. This is an opportunity to create structured data throughout the transaction since we are linked directly to the reliable source within the brokers' transportation management software, ensuring that financing is provided to carriers efficiently. This approach strengthens the network's resilience and potentially cuts costs significantly. By reducing expenses by 30% to 40%, we believe it's fair to share in the resulting benefits, which aligns with how SaaS businesses operate. This is a significant market to target. It's not just an experimental initiative for TriumphPay; it addresses a genuine financial challenge in the industry that we can improve.

Gary Tenner, Analyst

Thanks, Aaron, I appreciate that. One last question, just related to that, if I could, from a segment perspective, I mean, I guess since you're building this out to service other factors or provide it as a service to other factors, it almost seems like from a segment perspective, it could factoring or in the payments business. So just the thoughts around that and as it relates to kind of the expense load associated with the build-out there, can you talk about that a bit?

Aaron Graft, CEO

Yes, a great question. And such a good question because it's something we talked about. I mean, this is sort of why the corporate segment exists, because we're starting to do things that touch all sides. I'm going to answer your question, which I think the answer is, it ends up in payments because it's not us factoring as a service providing a service to the people who use the network. So I think that's logically where it fits. But just understand, like LoadPay, for example, the expense in developing LoadPay, some of that expense is showing up in the bank because underneath a LoadPay account is a checking account. And where do checking accounts live? They live in our banking segment. But the LoadPay structure and how we're going to market with it and how we're attaching it to the network, well, that happens inside of our payment segment. But if you want LoadPay to really work, you need to do instant purchasing, which gives the money, which allows us to pay like they alluded to this earlier. if a carrier gets a proof of delivery signed at 11:00 PM, being able to instantly purchase that doesn't really impress anyone unless you can have money in their account at 11:01 PM. Well, the technology for that and instant purchase and the artificial intelligence and all the back testing we've done on billions of transactions that happened in our factoring segment. And so what we're finding is as we're transitioning community bank to a financial technology platform is all three parts of our business add value to what we're creating so the answer is fast lives in payments. But I just need you to understand, and we will try to call it out as best we can, we use the bank for a lot of this. We use factoring and what we do inside of factoring to serve the network. And, of course, we use payments to host the network. So, it's more symbiotic probably than it's ever been historically.

Tim Valdez, Operational Expert

Our disclosures around all of this will absolutely evolve as this grows. And when we set up our segments the way that we did, we had three very distinct lines of business, and in a lot of cases, we were intentionally keeping them separate. And as we have evolved and as we see what is possible for us to build to serve the industry over the long term, it's all kind of coming back together. So I can't paint you a crystal clear picture of what that will look like because there's still a lot of things that we need to figure out, but you can expect that to evolve over time.

Aaron Graft, CEO

Thanks, Gary.

Operator, Operator

Thank you all for your questions today. Please limit it to two questions only. Our next question will come from Joanne Tunis from Raymond James. Please go ahead.

Unidentified Analyst, Analyst

Good morning.

Aaron Graft, CEO

Good morning, Joe.

Unidentified Analyst, Analyst

So going back to the revenue component of TPay, in the prior call, you mentioned that due to the challenging environment, you elected not to increase pricing for TPay customers in 2024, while also adding that you're not currently charging for all the services offered. I guess given the increasing density of TPay, how should we think about price increases in 2025? Or the benefit from a customer migrating to your new pricing model? Or I guess set a different way, assuming a static market, how much incremental dollar should we expect TPay to generate from a hypothetical customer after these price increases occur?

Aaron Graft, CEO

I mean, it's not a static market, right? But I mean, like, the density changes and enables monetization. I mean, I can't give it to you in a formula, Joe, I get why you're asking the question. It's a totally appropriate question. How this will go is we will onboard C.H. Robinson, right, and that volume will come. And you know what, by the time we're done onboarding C.H. Robinson, whether it's second or third quarter next year, there's going to be other names. And so when these contracts come up for renewal, we're going to be like, hey, when we negotiated this contract with you in the past, 15% of your transactions have the ability to be network transactions. Today that number is 60%. You can change your staffing model. This is now like cash application looks entirely different for a factor when you do that. So, yes, are we holding pricing because we think that we understand the freight recession? Sure, of course, but this is what I wrote in the letter is businesses that can create economies of scale and then share those benefits back with their constituents create fans. That is what we're after. We are going to create people who look at what we do and say, man, that is so much more efficient than we ever did it in the past. And I can see in my own bottom line that I'm making more money and so the piece of it that Triumph's taking, I get it. So the answer is, revenue will continue to go up. I think if you annualize our fee revenue quarter-to-quarter, and this was a lousy quarter, but again, it's a quarter. But still, if you annualize fee revenue growth and TriumphPay, it was 22% annualized, like in a lousy quarter in a soft market before Robinson's even here. So what we ultimately have to do is we got to take a $55 million revenue business and we got to grow it to $100 million. And we've told the market that if you put all this together, that we see a $1 billion opportunity, that's going to take a number of years, but we just have to keep adding revenue. And so if the world were static with the number of brokers we have now, in other words, if you onboarded everything we knew about now, including Robinson, and you're between 50% and 60%, probably closer to 60%, whenever that's done, you would see revenue go up, right, because we're adding more value to the factors and the brokers, as it were. But I promise you, there's going to be more volume coming. I guess I shouldn't say promise, but I am committed to and staking, we are betting very much that we're not done at high 50 percentile. Like, we're going beyond that. And every incremental value, every amount of density we add creates more value for the constituents for which we expect to be paid. And ultimately, we think it's $5 a network transaction, and we think we can collect that and the brokers win and the factors win, and the carriers win, win, win, that's what we want, that's why we think we're building something that is unique and enduring and not a brittle business and not taking advantage of its participants, but instead enabling everyone to win and that is what we're focused on.

Unidentified Analyst, Analyst

I appreciate it. And just going back to Robinson, can you provide more color on the economics of the deal and how it relates to other customers? I mean, like, since you announced the deal, has your pipeline changed for both brokers and factors interested in joining the network? And can you give us a refreshed view on how much incremental payment volumes contracted to come online throughout the balance of the year?

Aaron Graft, CEO

Yes, I'll let Melissa handle those details, but I want to clarify that we will never disclose pricing for any specific customer, whether it's Robinson or our smallest client. That's simply not how we operate. What I can say is that once Robinson is fully engaged, we plan to charge $5 per conforming transaction, with some costs covered by the factor and some by the broker. Robinson is taken into account in my analysis on this. We won't set a price with them that prevents us from delivering on our commitments to the market. I can't specify exactly when this will happen, and we have a lot of work ahead for them, but we're excited about the partnership. As for how that announcement has impacted our pipeline, Melissa, I'll let you address that.

Melissa Forman, CFO

Yes. I would say, last quarter I told you that I had not been more excited about the status of our pipeline in the history of TriumphPay, and I was very excited about where we were going and headed. I would just reiterate that this quarter, I am even more excited about our pipeline even after these big announcements with C.H. Robinson and ArcBest, because it continues to strengthen and grow. We certainly don't usually announce deals ahead of their go-live, but we did with C.H. Robinson because of the material volume that it contributes to the network and felt like we had to disclose that. But for the rest of those that are in our current integration pipeline, not just in contract signing and late-stage sales, we expect to near, if all of the volume that we have integrating this year. And if 100% of C.H. was ramped, we would be close to the 60% market density point that Aaron was talking about earlier. And so that's a substantial jump from the 47% where we are today to being close to 60% at the end of the year, assuming C.H. was ramped. So we're excited about it. Again, it's never been stronger. Yes, it does help make the phones ring when you're able to add this kind of density in the market and bring additional value through the network to our constituents.

Unidentified Analyst, Analyst

Let me just one thing, by the end of the year, even if Robinson goes live, we won't have all that volume probably until the third quarter of next year. So think of probably third quarter of next year. And do we know, and I'm asking in real time, but like expressing that in terms of dollar volume, what's in the pipeline approximately?

Melissa Forman, CFO

Do I want to say it?

Unidentified Analyst, Analyst

I don't know. I don't know.

Melissa Forman, CFO

It's more than $10 million or $10 billion rather.

Aaron Graft, CEO

Thanks, Joe.

Operator, Operator

Our next question comes from Jordan Ghent from Stephens. Please go ahead.

Jordan Ghent, Analyst

Hey, good morning. Thanks for taking my question. I just wanted to get a little more color on the network transaction fees. We've been getting teased about percentage of improvement of network volumes. But I just want to appreciate just how much of TPay revenue comes from the network fees, if you could disclose any of that, that would be great?

Aaron Graft, CEO

We have that...

Melissa Forman, CFO

We have that broken out that way.

Tim Valdez, Operational Expert

I don't think we do.

Aaron Graft, CEO

Let us come back to you on that. What you should be able to see right now in our disclosures is the volume of network fees for the quarter. Okay. We are not monetizing those at $5 a transaction right now. Hopefully, we've been clear about that. That, it's well below that number because we're rolling contracts, but I don't know that we have a precise number and I don't want to just say it off the cuff right now. And tell you something wrong. But we can look at adding that disclosure going forward. What you should know is we give you the absolute number of network transaction fees and we would say that we are not pricing it at $5 right now, because on both sides, again we're in the density-building phase. So, we're not charging full freight at this time. So, that's as much as I can say right now.

Unidentified Company Representative, Company Representative

What we do disclose is the amount of the fees that we're collecting from brokers and what we're collecting from factors, and there's network fees embedded in each of that.

Aaron Graft, CEO

Yes.

Jordan Ghent, Analyst

Okay, perfect. Thanks for answering that. Then maybe just one follow-up on the expense guidance. It was pretty clear in the letter you talked about kind of near-term expense, but I just want to maybe dig in more on the long-term, there's sales commissions that are going to be burning off over time, that should provide some relief. So if you could have any, or if you have any commentary on that, that would be great? Thank you.

Tim Valdez, Operational Expert

It's hard to look past the next several quarters that we've committed to. We are committing to keeping our expense levels within our current run rate for the foreseeable future. There's a lot that we need to do long-term. What we want to really get across though is that we believe that for the foreseeable future, for what's in front of us right now, the roster has been assembled. We've added a lot of really high-level talent over the last several months and quarters in anticipation of building what we're doing right now. We've spent some consulting dollars, we've added some people, we've added technology and we are confident that where we are today is where we can be for at least the next few quarters. We are going to have to be disciplined about what we take on and who we take on, between for the next few quarters in order to be able to meet that commitment that we're making. But it's something that we're confident that we will do.

Aaron Graft, CEO

On top of that, just know there are puts and takes in every quarter, right. This is a little bit the vagary of the system. We had a material consulting expense in this quarter. We could have delayed that. We could have tried to go that way on our own, but we've watched enough banking as a service relationships blow up that we wanted to do every I and cross every T and it didn't matter that it was going to create a drag. I think it's important and I'm not trying to back away from the question, but I just want to remind you of the North Stars here. Like I think about three things; think about the network and all that's attached to it, which includes LoadPay factoring as a service. All the things we want to do is a $1 billion revenue opportunity, we're at $55 million right now. So we got a lot to go do to get that done. The second thing that gets us there, that's an output, is getting to 80% of truckload density. And we don't stop there, there's LTL, there's other things, there's a shipper market, there's a ton of things we want to do, but that's a North Star, right of getting to 80%. And then lastly, and it ties to this question, is for our payment segment, which is currently operating at negative 10%. We've given an interim goal of we want to be at 25% EBITDA margin. We don't know exactly when that will hit, but obviously to get to 25%, we got to improve 35%. And long term, this business, this network business needs to deliver above a 50% EBITDA margin. So a $1 billion in revenue, 80% density in truckload brokerage and over a 50% margin, that's a home run. Like that's what we're going after. You are right in that in the short term, sales commissions do burn off, but those get backfilled, we need to go do account validations, checking account validations for thousands of new carriers, they're going to come on when Robinson goes live, why? Because, we are the trusted party to stand between the criminals, the fraudsters, and the good actors, right. Like, that's what we do. We handle people's money. And so there are puts and takes, right. Like, yes, sales commissions fall off, but we also have to do certain things to deliver on our network promises. But just I would again invite you to consider those North Stars. That's what we think about, right? And if you deliver those things and you're a bank investor here, if you can deliver that kind of margin and keeping everything else the same, like you're talking about an ROA approaching 2%, right? You've seen what our factoring business does in a normal cycle, obviously, the scalability and the efficiency in the payments business and we run a very efficient bank, with a low cost of funds. I don't want that to be lost. As you put all that together and that's a high ROE earning institution, but those three things that I talked to you about, the revenue, the density, and the EBITDA margin, that's the goal we're pursuing and everything we do begins with that in mind.

Jordan Ghent, Analyst

Perfect. Thanks for taking my question.

Aaron Graft, CEO

You got it.

Operator, Operator

Our next question comes from Hal Goetsch from B. Riley. Please go ahead.

Hal Goetsch, Analyst

Hey, good morning, everyone. My questions back to the factoring business. And I know you don't have control over the freight industry, it's uncontrollable. But I wanted to get your perspective on the downturn in that, if we look at a two-year stack, it's high 30's down volume. It's like even if I remove price effects of invoice pricing, it's down probably 20. That would be a depression in my playbook for volume. And I know a lot of stuff that goes over the road is food and beverage, so that's a big part of what's in my waste bin every week for what comes to my house, it gets shipped out and I had to go to a store. So could you just give us a perspective of what is really down? Like where are inventories that you can see across the country, are they leaner than ever before? Are we about as low as wholesale or retail inventories can go? Just give us your thoughts on it, because it seems like it's been pretty difficult. I can't imagine having a third year of this? Thanks.

Tim Valdez, Operational Expert

I'll start by addressing the current marketplace situation. One noteworthy observation is the significant difference between contract rates and spot rates. We've noticed some stabilization in the spot rate market, primarily among smaller carriers. This trend has been evident for several quarters. For instance, the second quarter wasn’t favorable for us, reaching its lowest point. However, we are carefully monitoring not only the length of this cycle but also the factors affecting margins. Many small carriers are currently operating below their costs, which is not a viable long-term situation. This segment continues to face the most challenges. A point of optimism lies in our close observation of fuel prices and their correlation with the average invoice amounts in the spot market. If the average invoice amounts rise in tandem with fuel costs, it indicates a certain level of pricing power, which has not been consistently seen over the past two years. We're beginning to notice this trend now—when fuel prices increase, average invoice amounts follow suit, typically with about a week’s delay; when fuel prices decrease, we see a corresponding drop in average invoices. Fuel is playing a significant role in this dynamic. In terms of the duration of cycles, it appears to align with the length of previous upcycles, such as those in 2013, 2014, 2018, and 2019, which typically lasted as long as the upcycle itself. While we think we may be nearing the end of this cycle, we have encountered misleading indicators before, like at the end of the fourth quarter heading into the first quarter. Therefore, we're cautious about declaring a definitive outcome. The situation shows signs of improvement, and we remain hopeful, but we're not quite there yet.

Hal Goetsch, Analyst

Okay. Thank you.

Operator, Operator

Our next question comes from Frank Schiraldi from Piper Sandler. Please go ahead.

Frank Schiraldi, Analyst

Good morning.

Aaron Graft, CEO

Good morning.

Frank Schiraldi, Analyst

I wanted to ask, Aaron, about the revenue target of $100 million for the payments network that we've discussed previously. Could you provide some insight on the timing for achieving that target? Do you think we should aim for the end of 2025 with a 25% EBITDA margin? I'd appreciate any guidance you could offer on this.

Aaron Graft, CEO

Brad Voss is here and ready to challenge me, as is Melissa. I believe that in order to reach $100 million in revenue by December 31, 2025, everything would need to align perfectly. So I wouldn't place that target there. Maybe it's mid-2026 or later, but I can't say for certain. It's going to be inconsistent, as this hasn’t been accomplished before, or at least I haven’t experienced it. This hasn’t been done in transportation either. I firmly believe that achieving higher density will address every challenge we face. We are approaching a key moment in terms of density. For instance, TriumphPay processed payments for about 126,000 carriers last quarter, which likely reflects a high density level. Once we reach that threshold, monetization will follow quickly, typical of similar network businesses. So, will we see that in 2025? I can't say; that requires a lot of growth by then. That's why our focus is mainly on density. Is it 2026? I certainly hope so. We recognize that we need to double our current revenue, as there's still much work to be done afterward. If it were up to me, I'd place that target in 2026 or later. However, our business isn't linear, and I can't accurately predict the freight market enough to provide a precise timeframe beyond that.

Frank Schiraldi, Analyst

Alright, fair enough. When it comes to monetization, obviously, monetizing the factors gets you a significant way toward that $5 per network transaction you’ve discussed. I believe the decision on that is typically made annually. How confident are you about 2025 being the year when you can fully monetize the factors to achieve the $3.50 per transaction? Does that still seem promising, or is it likely to be delayed another year considering the state of the recession? What are your updated thoughts on this?

Aaron Graft, CEO

It's difficult to make predictions. However, we have the advantage of observing our own factoring business, which represents 15% of the market. Four out of the top five, eight out of the top ten, 24 out of the top thirty, and 59 out of the top one hundred brokers are utilizing our services, some for audits, some for payments, and some for both. There's significant value for those using our services in just one capacity. For example, if a broker is only using us for audits, there are major opportunities for us to provide payments as well. In discussions and negotiations with factoring companies using our system, we demonstrate the historical volume at the time of contract signing as well as the current and projected volumes. We aim to have open discussions about fair practices because the success of factoring companies is crucial for our network. The industry relies on their success to support small truckers. We acknowledge that we can't cover everything ourselves, nor do we want to; a thriving industry is essential. I am confident that pricing adjustments will reflect the value we provide. This will be influenced by broader market conditions. We see positive signs, and if certain political changes occur, they could benefit the market, but these factors are unpredictable. Ultimately, our goal is to reduce a factoring company's costs from $10 to $7 for handling invoices. We can guide them in this with our density and factoring as a service offerings. We're not asking them to trust us blindly; we can clearly demonstrate how it's done. Therefore, we expect compensation that correlates with the value we create. We aspire to cultivate loyal partners rather than just customers and adopt a long-term perspective on these relationships.

Frank Schiraldi, Analyst

Got you. It seems I may be asking the last question. If I could quickly add one more, Aaron, you mentioned the potential implications of a Trump Presidency and the possibility of higher tariffs. Do you think that in the short term, that could be the main factor to help pull us out of the freight recession? Would it potentially reduce the necessary capacity cuts of 15% that you've discussed? Is that the key catalyst for the freight industry as we look towards the election?

Unidentified Company Representative, Company Representative

If it does happen, it's not a long-term solution. Ultimately, it comes down to tonnage and capacity. I doubt that the actions of any president, whether it's Trump, Biden, or someone else, will significantly impact tonnage as they might claim during campaigns. The economy is quite complex. More manufacturing in Mexico is beneficial for trucking, but even if production occurs in China and arrives on the West Coast in large quantities, which we believe is currently the case, it's merely a temporary increase. It's similar to how a hurricane creates short-term market opportunities. In the long run, I still think there is too much capacity. We are supportive of our carriers getting paid well because they have fixed costs and work hard, and I want them to succeed. However, this does not alter my long-term view that we have excessive capacity in relation to the freight that needs to be moved in the country, and whether changes occur quickly or slowly, we must work towards normalizing that situation.

Frank Schiraldi, Analyst

Appreciate it. Thanks for all the color.

Operator, Operator

And there are no further questions at this time. Thank you.

Aaron Graft, CEO

Thank you all for joining us. Hope you have a great rest of your summer, and be careful playing pickleball.