CoreCard Corporation
Q3 2019 Earnings Call Transcript

Published: 1 Nov 2019

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Earnings Release and Investors Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]I would now like to hand the conference over to the speaker today, Matt White, Chief Financial Officer. Please go ahead sir.

[Matt White:]

Thank you. Good morning, everyone. As Leland noted in our press release this morning, our revenue and profitability results met our expectations, as our platform continues to be validated by leading corporations. Revenue for the third quarter 2019 was and $9.522 million compared to revenue for the third quarter of 2018 of $5.415 million, an increase of 76%. The components of our revenue for the third quarter consisted of license revenue at $$2.225 million, professional services revenue of $4.579 million, processing and maintenance revenue of $2.235 million and third-party revenue for $483,000.I'd now like to talk to the important components of our revenue. As we've mentioned in previous statements, our license revenue will vary from quarter-to-quarter. The third quarter increase in license revenue was driven by the retail launch of a new product related to our largest customer. As a reminder, we received license revenue, primarily when our customers achieve new active account tiers. Once a customer achieves a new tier level, they receive a perpetual license up to that number of accounts. Inactive accounts do not count towards the licensed year.In addition we charge annual maintenance to our licensed customers, which is reflected in our processing and maintenance revenue line. Maintenance revenue increases when customers reach new license tiers. In the contract with our largest licensed customer includes a maximum tier level, which because of the significant number of accounts allows them to utilize the software for any number of active accounts once the maximum tier level is achieved. We would expect it to be several years if ever before they hit the maximum tier level. This large customer currently uses the software for a single institution, additional license fees apply if multiple institutions are added.Looking further into the revenue detail provided, professional services revenue continues to comprise a significant portion of our overall revenue for the third quarter at the 9-month period 2019. However, as we previously stated, we expect that to decrease as a percentage of total revenue over time, as our customers utilize the new features we've developed to add active accounts to their system, which is ultimately reflected in our license revenue and processing and maintenance revenue lines.Additionally, we continuously create new functionality for our customers. And as such, we charge annual maintenance fees for our professional services, which is also reflected in our processing and maintenance line. As a reminder, we do not perform any professional services for third parties that are not licensed or processing customers. And lastly, for revenue, our third-party revenue generally has a very low margin and constitutes services we provide on behalf of our customers, which we charge at or slightly above cost. We recognize this revenue growth for accounting purposes.And now I'll turn to some other highlights of our income statement. We reported significantly higher income from operations of $4.200 million for Q3 2019 compared to $1.736 million for Q3 2018. This resulted in operating margin of 44% for Q3 2019 compared to 32% for Q3 2018 and 35% for Q3 2019. The year-over-year improvement was driven by our license revenue, contributing significantly more to total revenue. We achieved a sequential increase in margin for the third quarter of 2019 compared to both the first and second quarters of 2019. This improvement again was driven by higher license revenue partially offset by higher general and administrative expenses related to legal and hiring costs and also higher research and development expenses, related to accrued employee bonuses.Our year-to-date 2019 tax rate was 24.7% compared to 4.6% in the comparable 2018 period, due to the utilization of net operating loss carried forwards since 2018. And finally earnings per diluted share for the quarter was $0.34 compared to $0.21 for Q3 2018.And with that I'll turn it to Leland.

[James Strange:]

Okay, thanks, Matt. Matt talked about the actual financial numbers, but I'll be adding commentary. And everything I say and anything Matt just said that was not in actual financial reporting patch should be considered in process as what is commonly known as a forward-looking statement. We're saying what we think and believe as we sit here today and you should process all of it as just that. It's what we think and believe and not a promise or prediction.I wish we didn't have to format every conversation this way but given our litigious society and our recent experience with the legal system it's a required warning and caveat.I guess staying on the subject of litigation or legal matters, there's actually nothing material to report. I will note regarding the claims from the shorts that a lead plaintiff has been affirmed by the federal judge and a hearing has been scheduled later in November. The independent INS Directors have also asked a firm to provide them an independent report on the claims and that is in process.Earlier I thought these issues would be resolved this year, but now counsel has advised it will probably linger on into the next year. As I stated on an earlier call, we believe there is no substance to any of the claims. I'll be glad if I could report this litigation is behind us, but it is not today and it does have cost to both dollars and management time. We do not expect to pay anything out to the claimants. Counsel has advised against being more specific about cost but they are not large. I'll even guess them to be under $500,000 as for unreimbursed by insurance to the company.On the other hand, our insurance costs have gone up both as a result of these actions and higher revenues and by ways [ph] of the company. Now what really counts results from operations. The quarter pretty much played out as we expected. The license revenue was always going to be difficult to project and it came in towards the middle of the road, although I should remind some expected a much larger number.I earlier said, there could be what I characterize as pops in licensing [ph] revenue. Was this a pop in my binocular? No. I will reiterate it was middle of the road from our perspective and resulted from one of the most successful launches of a new credit card product ever.Our clients and partners in this particular endeavor are very happy with the results, although there were and still are plenty in the road. Talking a little bit more about that. Every day, we have more cards on our system that we had the day before. That means we can expect to see new problems continually pop-up that need to be resolved. This is not new for us and it is exactly what has happened for the last many years. We certainly do not think we're ready to immediately process 10 million or 20 million accounts with the system exactly as it is today but we are confident that we see a path to get there and every day we move further down that path.There will not be a moment when it is “done”. It's a continuous, evolving process that's best undertaken with close cooperation between our exceptional CoreCard team and the expertise and experience of our clients and partners.We are laser focused today on building a solid infrastructure to enable CoreCard to eventually take on the very largest clients that the giants in the industry currently serve. That includes parallel development to initially have [indiscernible]One of our advantages is our ability to add new functionality rapidly and that word rapidly needs to be taken contextually within how it's understood in the industry. Quoting the functionality is just the beginning of the process as different functionality places different stresses on the operating infrastructure components such as database hits or CPU utilization. It also often requires substantial rewriting the reports.I bring this up just to emphasize what I've stated before this is a very, very complex software undertaking, which is why there have been a very few new entrants in the open loop credit card space in the past 20 years.I should add here, however, that I do expect new competition. Many of the prepaid card processers are spending large sums to get into the credit game. They would definitely eventually get there, but their early customers can expect some really, really rugged periods as they find it is a magnitude perhaps times 10 more difficult than prepaid. What you don't know, you don't know.If I had any surprise for the quarter, it would be the amount of professional services we deliver it. It was higher than I expected and I would not expect a number this high the next few quarters, although the numbers would still be very solid very good.It's too early to have any better visibility or good handle on 2020 as most of our current clients are now focusing on getting through this holiday shopping season. We are hiring new employees at rapid clip, both internationally and in Atlanta. I probably would not have expected the current growth projections for new employee in Atlanta, but it's currently needed to provide the needed expertise for our current and projected business needs. We expect at least 30 new hires for the second half of 2019, but we will also experience normal attrition in our India offices.This growth in resources should speak to our belief as to the stability of our professional services. Our base underlying business, both processing and licensed customer revenue sources, continues to grow. I just want to make the point that we continue to grow our current base of business from existing customers. We're not just relying on new opportunities to provide growth. There are new opportunities that will also add to our revenue next year, although I'm uncomfortable trying to project how quickly they will come online.I know investors always want us to talk pipeline. It's not easy in our present situation to explicitly frame opportunities that way. We think strategically for longer term contribution as to what new business we bring on. And we do it day by day depending on what we see. To help you understand that we have inbound request for discussions about providing a processing services every single week. Now we don't see large opportunities weekly, they may just come in every month or so. And when we decide to pursue one of these it may be three to nine months before they contribute meaningfully to revenue. These have to be embedded against what current customers want to do to expand their business and in most situations we'll choose to develop more resources to current customers.The reason investors want us to talk about pipeline is that they could be used as a proxy for future results. We don't give what is generally called guidance, but we do try to give a general sense of what we believe will happen for the next few quarters. Our current belief is that fourth quarter would not be as strong but still good as the third quarter for professional services revenues and that license revenue is likely to be similar to the third quarter. Certainly the fourth quarter this year will be better than the fourth quarter of the 2018 year.For 2020, we see continued growth but not at the pace we had for the full year 2019 over 2018. But we do expect to grow and see the 2020 year as the one to catch our breath, while hardening our infrastructure to line up for higher growth in the future years. So that pretty well sums up both the third quarter and how we see the future. I think I will spend most the rest of our time talking about questions.And operator you can take questions and we also have some that were faxed in that I will deal with.

[Operator:]

[Operator Instructions]

[James Strange:]

Okay. While she's compiling Q&A, I'm taking a list of questions that some of you have faxed in. And I'm going to take the -- what I consider the funniest one first. So, please, as I read this and answer this everyone in this room has got a smile on their faces as I do. So here's what it says. I'll skip the first part.It says something about I don't want to retire but you could do whatever you want. You don't need this job. In 2009 -- hey everybody understand, so this investor went all the way back to 2009 to read what I said that's somewhat scary. But he said, in 2009, you mentioned that you're too old to be talking about 10 years. Now we are in 2019, how long would you be happy to be the CEO of Intelligent Systems?And I actually like to remember somebody asking me a question a long time ago, saying what do you see out in 10 years and I'm sure I said, I'm not even going to look out there because that will be somebody else doing it. And lo behold I'm still doing it. So I'm not going to answer how long. I guess as long as it's fun and as long as we're making progress but I thought that was a real interesting situation that someone went all the way back to there.Operator, do you have any questions otherwise I will take some others that I have here that were emailed in?

[Operator:]

Your first question comes from line of Ishfaque Faruk from Sidoti & Company. Your line is open.

[Ishfaque Faruk:]

Hi, good morning, Leland and Matt. Just a few questions for me. And congrats on the really strong results across the board. Your license revenue really surprised to the upside and it's just not me, I think I asked a lot of people feel that your license revenue was higher than many anticipated. And Leland you briefly touched on that you expect Q4 license revenues to be similar to Q3, but going forward when you look out into 2020 and 2021, do you feel as good about license revenues being at these if you want to call it new normals from prior quarters?

[James Strange:]

Well, I've always said it's going to be lumpy. And going out further I don't expect every quarter to be similar to this quarter or what I said for the fourth quarter. I don't know whether the first quarter will have much license revenue or not I'm not saying it won't, I just don't know.And remember license revenue depends on how well other people do not what we do. And they don't know either how well they will do. So, it's just really hard to project that. We will continue to have, I will suspect significant license revenue in 2020. I just don't know how it will break out quarter-by-quarter.

[Ishfaque Faruk:]

Okay and as a follow-up to that and -- can you give us a sense for what percentage or what chunk of the license revenue in Q3 was from this major new customer? And if you had any new ones?

[James Strange:]

Yes, no, I really can't. That would be disclosing more than we're allowed to disclose from a customer perspective. Sorry, I can't do that. Listen, let me add -- I'll make it say that most of it came from there about that.

[Ishfaque Faruk:]

Yes, that's exactly -- that works for me. Yes, in terms of professional services, Matt told me previously that professional services was expected to sort of taper off in Q3, but it was much higher than I expected.Matt or Leland, can you give me a sense of what happened during Q3 and do you expect that to sort of roll into Q4?

[James Strange:]

Well, I think it's a good example of how it's so hard to predict. But here we are already in Q4 and I can't tell you whether there will be the same or more I could tell you I expect them to be less.

[Matt White:]

They were actually less for Q3 if you look at it compared to Q2. So, -- but it was a pretty minimal decline.

[Ishfaque Faruk:]

Yes, it was pretty much…

[James Strange:]

Yes, it's really hard for two reasons. One is we don't know exactly what the current demand would be and second there is the issue of GAAP accounting. You finish a project and then you can put $300,000 in that quarter or you don't finish that project and it goes into the next quarter. Well, that's the two reasons, it's really is very difficult.I think what should be important to advisors is the sense of how solid it is or is it going to vaporize. And I think what we're telling you we expect and we believe that it's going to stay pretty solid.Now, our bet that's probably middle of the line I guess for the next year, meaning it could go up or it could go down. We won't be surprised to see it deviate from the line some, in fact, I don't want to project any closer than that but it's going to -- its solid it's recurring in every sense of the word -- repeating in every sense of the world better way to say it.

[Ishfaque Faruk:]

Okay and then since we are talking about recurring. So, when I look at your recurring revenues, it's around low 20% 23% or so I believe. But when I look at like you know large established processing companies let's say for example FIS, their recurring revenue base is around like 82% or so. When you look out in the long-term, what's your take that what's the recurring revenue can grow up to in the future for INS?

[James Strange:]

I would say when I get as big as FIS; I would be 82% also. We're really small for those percentages to be used as any kind of an indicator this point in time. We're just too small and the revenue components are different from FIS. So, I could come up with those, kind of, numbers and play games with it, but I just not have persisted doing that because it really is not relevant.

[Ishfaque Faruk:]

Yep, got it. Okay. And Leland and Matt, we talked about this before and -- can you give me a sense for your new -- you mentioned in your prepared remarks that you're seeing more interest from processing clients than licensing customers. Can you tell me in Q3 – we’re already in Q4, what has been the recent conversation with clients on the processing and the licensing side and how many that would be great too?

[James Strange:]

I really can't answer that with that, kind of, specificity. I really can't. We constantly have conversations and I'm not going to make numbers or talk about numbers, sorry about that, can't do that.

[Ishfaque Faruk:]

Okay. Can you give me some, sort of, color in terms of other than most of your customers being processing clients?

[James Strange:]

Well, not really. You have to look at -- you're talking about the size of the clients, or are you talking about the size of the revenue? We're going to get. I mean there's so many ways to look at that. I don't think I can say anything meaningful. Sorry, I just don't think I can answer that.

[Ishfaque Faruk:]

Okay, okay. And in terms of other large, major financial institutions, do you have like any inbound on in terms of like similar big sized clients?

[James Strange:]

Again, I'm not going to comment on that. And let me just say I appreciate your question, but let's give some other people a chance to ask some questions too. And if you like to call us afterwards, we can answer whatever we can. So I appreciate your questions they're good questions. They're just certain things you know that we can't answer. But thanks.

[Operator:]

Your next question comes from the line of Kelvin Seetoh from 10x Capital. Your line is open.

[Kelvin Seetoh:]

Hi, good morning Leland. Yeah, I hope that you can extend the call because some of us couldn't get -- even get our questions across. I really like the example, whereby, you demonstrated the Base Pro Shops example. So I'm just thinking about this right, given the level of flexibility of the software and having a real possibility of being adopted by a larger customer, can you share may be some general feedback on existing customers or stories that highlight the power of your platform or how has CoreCard been able to help them in their businesses?

[James Strange:]

I think you may have e-mailed that question. It's just not an easy question to answer. It's -- in order to get a licensed customer, it takes months of talking about the platform and looking at bunch of things. So there's not any elevator pitch or elevator answer that I can give you just like they don’t accept an elevator pitch. It's the whole -- I've said this, I think that we know it's the whole bundle that makes it work. It's not a single, 1 2 3 here's the top three and here's why people choose it. It -- this is very complex and it's a whole bundle of things that cause people to choose it. So again I can't give you highlights, I can't give you a headline that makes it work.

[Kelvin Seetoh:]

All right. Thank you.

[Operator:]

Your next question comes from the line of Sam Rebotsky from SER Asset Management. Your line is open.

[Sam Rebotsky:]

Yes, good morning Leland and Matt. Keep having fun and it was nice to meet you in person after all these years. And as far as the licensing revenue, do we need more people to take on more clients? And the licensing revenue that we have, is there -- will that produce processing? Is it producing processing yet? And is it, sort of -- will it make the processing significantly greater amount?

[James Strange:]

Yeah, okay thanks. Licensing does not produce processing. I mean, licensing is strictly some other -- our customer do their own processes. So it doesn't produce any processing license for us. It does produce maintenance and some more. So is there a recurring revenue from the license.As to your question about do we need many people to take new clients? The answer is yes, I think most companies that grow had to have add new employees in order to grow. We have to add new employees to grow and we are adding new employees. It of course did take some time for training to make that happen and -- but we're doing that. So yes we are adding new employees in order to be able to grow.

[Sam Rebotsky:]

And then are investment the $3.300 million investment that we have 40%, could you talk a little bit more about that where they're going? How are they growing? I think there -- it's an Indian company. I think you had mentioned. Any color on that and how they are doing? And are you pleased with their growth at this point?

[James Strange:]

It's not an Indian company. It's a domestic company. And it's a different kind of company. So it's hard to -- again hard answer that. We'll probably talk more about that next year as they kind of get more visibility, but it's a company that does conferencing and has expertise and identity that applies to the card world. And it's not something that has to do with our processing, but it's -- we think it's a nice company.We hope to get a good return from the investment. But it is not as closely aligned to what we do as we thought it might be when we made the first connection. I will just say that upfront, but we think it's a good situation it's not something we spent any time with whatsoever, but we expect to get a decent return from it not some 10 times like we got with couple of others but we hope to make money on it.

[Sam Rebotsky:]

Every thing seems great, Leland. Keep up the good work and have fun.

[James Strange:]

Okay. Thank you.

[Operator:]

There are no further questions at this time. Leland I turn the call back over to you.

[James Strange:]

All right. Well we thank everyone for joining the call today. As usual I end it by saying that, if you have other questions that we will be able to answer knowing that we can't -- we can never answer everything you want us to answer, but please give us a call we are available. So we look forward to connecting again on our next call. Thanks everybody for joining us.

[Operator:]

Ladies and gentlemen this concludes today's conference call. Thank you for participating. You may now disconnect.