CoreCard Corp (CCRD) 2003 Q2 法說會逐字稿

Good day everyone and welcome to the Intelligent Systems second quarter earnings conference call. For opening remarks I will now turn the call over to the President and Chief Executive Officer of Intelligent Systems Corporation, Mr. Leland Strange. Please go ahead sir.

Good morning welcome to Intelligent Systems conference call and live webcast. During this call, we plan to discuss the financial results of our second quarter and year-to-date period ended June 30, 2003 and highlight some of the progress and future plans that we have. We issued a press release this morning with our quarterly results and will have that available for reference or for questions. We will follow the same format that we usually do. I will give you some opening remarks and then Bonnie Herron, our Chief Financial Officer will give you the financial results. After that, I will come back on with more comments, and then we will open up for any questions you may have.

The call is also being webcast and will be archived for twelve months. You can access the webcast from our website at www.IntelligentSystems.com by checking the Webcast icon on the screen. Before we start, I will start with some of the legal things. I will remind you that during the call we will likely make what could be called forward-looking statements where relying on the provisions of the Private Securities Litigation Reform Act of 1995 and providing this information which is based on current assumptions and information about available to us at this time. What we actually achieve could be very different from our current plans for a variety of reasons, and we are not obligated to update you on changes that may occur. You should read our Form 10-K that we filed for 2002 as well as our Form 10-Q for the quarter that will be filed next week to better understand from the risks and uncertainties that affect us.

Again assuming you have all seen the press release issued this morning, we will refer to that. We will not repeat all of the information in it. I would rather use the time to provide additional explanations and other nonfinancial information and to answer any questions you may have. Since the last call in early May, there has really not been any significant change in our operations or in our prospects. One of our companies may take a step back or sideways while others are moving forward, but generally we are moving about on plan for operating. I think that plan given our call in May, where I feel somewhat optimistic that we are just slightly moving slightly forward to neutral and generally things are still in a very neutral state.

The most significant event in 2003 to date that effects our reported results was not related your current operations. You will recall that in the first quarter of this year, a settlement was reached with First Data resolved their claims and released the escrow balance the PaySys shareholders. Our share of the escrow release was a cash payment of $4.2 million in March, and a second and final payment of $281,000 that we received in June. These amounts are included in the line investment income for the three and six-month periods ending June 30, 2003. We were pleased with the amount and stick to the timing of the release of escrow fund which originally was scheduled to be released over a four-year time period, rather than settle all at once as was done this year. It was all settled in a little over two years, rather than the original four-year time period.

For the second quarter, we reported a loss of $2.2 million or 49 cents per share and year-to-date our loss was $1.2 million or 28 cents per share. These losses are significantly lower than we reported in the same periods last year even after taking into account the income related escrow fund. The loss from operations of $2.6 million for the second quarter 2003 was almost $1 million less than the loss reported by the same operating companies in the same quarter of last year. As in prior periods, most of the loss from operations reflects investments by our VISaer and CoreCard subs, a new software product. We will go into more detail on the progress and status of each of these later in the call.

In our last call, I commented that I was generally feeling better about the underlying long-term business prospects of our sub-company than I had in the past year or so. Certainly we continue to have some on-going short-term challenges to meet in these uncertain economic and political time, some of which are within our control and others that are not. But overall I continue to feel fairly positive about our progress and prospects at this point. Again a little later I will touch on some of the short-term factors that have affected or may affect our subsidiary company results for 2003. At this point I will ask Bonnie to review the results of our first quarter in more detail.

Thank you Leland. Our consolidated results for the second quarter and year-to-date period include the same four subsidiaries as in 2002, so the comparison between quarters reflects improving results of the same operating companies. Our information technology segment includes QS Technologies, which develops and sells software and services to public health organizations; VISaer, which develops and sells software and support services to maintenance repair and overall sectors of commercial aviation industry; and CoreCard Software, which develops and sells software for financial institutions and retailers to process various types of accounts receivables, loans and credits and debit cards transactions. Our Industrial Products segment includes ChemFree, which manufactures and markets a line of bioremediating parts washer systems.

Our consolidated revenue includes both product revenue and service revenue. For the second quarter our total revenue was $2.8 million, an increase of 27 percent compared to the second period last year. Of this amount, our product revenue, which include sales of ChemFree products as well as software licenses increased 35 percent over the second period 2002; and our service revenue, which includes professional services and maintenance contracts at our software subsidiaries increased 16 percent compared to the same period last year. On a year-to-date basis, our total revenue was up 36 percent compared to 2002, with a 45 percent increase in service revenue and a 30 percent increase in product revenue. These results include only a small amount of revenue from our CoreCard Software subsidiary, which is not expected to recognize significant revenue until early 2004.

The period-to-period growth in product revenue is due to strong sales levels at ChemFree subsidiary due to increased demand for its parts washers with particularly strong growth in the European market. The growth in service revenue reflects mainly a higher level of billings at VISaer for professional services, and increase at the QS Technologies subsidiary for annual maintenance contracts due to an expanding customer base. At the end of June, our VISaer subsidiary has accumulated approximately $4.6 million in long-term deferred revenues. That represents payments made to VISaer for their stock software product, but will not be recognized as revenue until next year. At the end of June, we also have approximately $3.1 million in short-term unearned revenue relating to QS Technologies and VISaer that will be recognized within the next twelve months.

Our operating loss was 903,000 less than in the second quarter last year and approximately the same as in the first quarter of this year. Year-to-date, our operating loss is $2 million less than for the six-month period last year. A reduction compared to last year at this time is due to the net effect of higher revenue and profit, gross profit contributions combined with a reduction in the consolidated operating expenses of almost $555,000 in the second quarter, and $1.1 (technical difficulty) to six-month period today.

We reduced our G&A expenses by eliminating duplicate expenses after the acquisition of CoreCard last year. We also reduced R&D expenses at both CoreCard and VISaer because this year the new products are further along in their development cycles and some of the heavy up front expenses for manpower and subcontractors have been scaled back and realigned to the current requirements.

As Leland mentioned in his introduction we have a major source of investment income in our year-to-date results related to the settlement of PaySys escrow fund. Since we had not accrued any amount for the escrow fund in our original gain on the base of sale, the $4.5 million cash we received translates into a $4.5 million gain on the escrow settlement. Part of this investment gain was offset in the first quarter by a write-down totaling $719,000 to reduce carrying value of our minority position in RX solutions and the early-stage company that sold its principle assets in the first quarter.

In the second quarter we took the $76,000 charge to reduce the carrying value of another software company in which we have a small position based on the pricing of any financing round for that company at a valuation lower than our initial investment. The net effect of PaySys escrow gain and the investment reserves yielded net investment income of $205,000 for the second quarter, and $3.7 million for the six-month period.

Taking a look at the balance sheet at the end of June, you can see that we had cash at $3.1 million. We have accounts receivable of $3 million, total assets of just over $17 million, and no bank debt. Cash used to support the VISaer and CoreCard operations in the first six-month 2002 was approximately $1 million less than in the same period last year. Although it was more than we anticipated going into 2003. VISaer in particular had been impacted by some delays in anticipated contract awards and implementations due in large part to the SARS epidemic earlier in the year, and the continued weakness in the commercial aviation market.

While they continue to build an impressive software product to win new contracts and develop a strong pipeline of prospects, some anticipated contracts were delayed due to economic uncertainty and the time required to finalize those contracts and get approval for project plans and payments from large corporate customers is a somewhat slower process than anticipated, resulting in the need for more cash. However, we've adjusted for these factors and believe our consolidated cash requirements for the balance of the year will be considerably less than in the first half. As our three software subsidiaries are receiving payments on milestone achievements and implementations (technical difficulty)

Thanks Bonnie. We will spend a little more time looking at the progress and prospects of each of subs. We will start with VISaer. The markets that VISaer is addressing represents a significant worldwide opportunity that they appear to be in a good position (technical difficulty) to happen to. They're building a strong prospect pipeline of opportunities with smaller domestic airlines, international customers, and with third-party airline maintenance companies. We believe that the new software gives them a very competitive product offering that continued to add customers, and they have not lost any prospective contracts with the competition all of this year. In the second quarter 2003, VISaer delivered a major version release of its new Web based software which will allow its customers to handle all of the complex business and regulatory requirements for their maintenance, repair and overhaul operations. As Bonnie mentioned, buying decisions throughout the industry take a long time, are subject to delays beyond VISaer (indiscernible). Even after winning a contract, the time frame for specifying, implementing in receiving payments for this complex product is quite lengthy. The airline industry continues to be weak and the first half of the year the SARS epidemic created another source of uncertainty, particularly in the Pacific markets. Clearly travel in the affected international markets was down significantly, and some of the Asia-Pacific airlines in the prospect pipeline delayed decisions to purchase or implement software systems. We're taking a conservative and proactive approach during this period and focusing our resources on implementing current contracts and meeting project milestones while reducing sales and marketing finances so there is better visibility on the near-term market dynamic. We believe that VISaer's management is building value for the future and developing and delivering a comprehensive market leading product, while managing its existing contracts, special service activities, cash requirements in an industry with long buying cycles in current economic weakness. You may recall that UPS has been one of our partners in developing the software product, and they are using it what their own fleet of planes.

Second company I will talk about is CoreCard Software. The company that was spun off to the PaySys of shareholders at the time of the PaySys sell in 2001. Intelligent Systems owns approximately 87 percent of CoreCard at this time. We have made a lot of progress in the past year; and I believe CoreCard has developed a product that will deliver real value to the customers, particularly for the new card products for retail and buyings. However, the buying cycle is generally lengthy, and as a new company one of the key challenges right now is to secure strong referenceable customer installations. Our software delivers a global card transaction processing system that combined web flexibility, ease-of-use and rich features as multilingual, multicurrency software product runs on PC-based servers rather than on mainframe, thus providing lower overall cost of ownership and, most importantly, greater flexibility to implement new marketing programs and ways to manage customer card accounts.

Earlier this year, in an independent test we demonstrated our software can successfully process billions of accounts in PC-based servers. In the second quarter this year, CoreCard signed its first significant software license with Fingerhut Direct, a direct to the consumer marketing company, that will use our software to manage its accounts receivable in a very fast growing industry. They selected our core issue of private-label credit management and payment processing system and CoreCOLLECT, a credit management tool to collect Fingerhut credit portfolio. We are in the process of implementing this installation, and in less than 90 days from contract signing which is a far shorter time frame that is typical of such projects.

This contract underscores the progress we have made in developing and bring into market a full featured card management system. We're committed to making our first installation strong reference customers and expect that we will be able to recognize revenue on the Fingerhut contract in early 2004. We also have other initiatives and potential prospects; but I want to be conservative in spending marketing of sales resources that we are not chasing, opportunities that may not be good near-term fits for the company or provide strong reference customers. We will grow it steadily, slowly because that is the kind of growth that financial customers expect.

As Bonnie mentioned earlier, our ChemFree sub has seen some positive trends in the market for non-hazardous parts washers. Coming off a record year in 2002, the 2003 results are on plan for the year and have been bolstered by strong international sales and our favorable product mix which resulted in revenue increases of more than 25 percent in the three and six periods this year, compared to last year. While that level of growth may be difficult to maintain, especially during the typically slow summer season, there does seem to be growing interest from large automotive repair chains and corporations as well as state and local initiatives to move away from solvent-based systems which we believe can be turned to ChemFree's benefit.

Finally, our QS Technologies sub entered 2003 with a solid pipeline of contracts awarded for implementation this year, a good pipeline of prospects for its public health software product. We expected them to be solidly profitable cash positive for 2003, barring unforeseen delays in project implementations. In the first half of the year, implementations of several contracts did slip from the second to the third quarter due to customer requests. But these are anticipated to be completed on the revised schedule in the second half of 2003.

Last year there was clearly some reductions in state and local budgets and delays in contract awards; however the trend has been improving in recent months, and a number of long delayed project have been awarded. The renewed emphasis on public health and safety is also a positive trend. As I mentioned last time, 2003 marks the 30th anniversary of Intelligent Systems and more than 20 years since we became a public company. Much has changed in that time, but what hasn't changed is our committed to growing promising early-stage technology companies into managing our company's internal processes and reporting requirements with honesty and integrity. At various times, we may or may not sell with the subs; but we do get offers. We do know what the prospects are, but at the present time we believe that it is best to hang onto these and build them for future business.

Let's open the lines now for any questions you may have.

(CALLER INSTRUCTIONS) at this time there are no questions. I will now turn the call back over to management for closing remarks.

We just what to thank you for taking the time to listen to the call and for your interest in the company. We will continue to move forward as we have in the first six-month and hopefully continue to report better results for the last half of the year. Again, thank you.

Thank you for participating in today's Intelligent Systems conference call. You may now disconnect.