CoreCard Corp (CCRD) 2003 Q3 法說會逐字稿

Good morning. My name is Brook, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Intelligent Systems third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. If would you like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. I would now like to introduce Mr. Leland Strange, President and Chief Executive Officer of Intelligent Systems Corporation. Thank you. Mr. Strange, you may begin your conference.

Thank you, good morning. Welcome to the Intelligent Systems conference call and webcast. I don't expect our remarks to be very long this morning, but we'll go right to it. We will discuss financial results of the third quarter, year to date period. I know the press release went out this morning so I assume you have that and you will use that for reference. We'll follow the same format as we usually do. I'll give you some opening remarks, then Bonnie Herron, our CFO will go over the financial results. After that I'll come back and offer some more comments and then we'll open it up for questions you may have. The call is being webcast and will be archived for 12 months is you wish to replay it.

Before we start, let me remind you that during this call we will likely make what could be called forward-looking statements or good guesses. So we're relying on the provisions of the Private Securities Litigation Reform Act providing this information which is based on what we know now and the information we now have. Obviously that can change and we may or may not be able to advise you of any of those changes. You should read our Form 10-K that we filed for 2002, as well as our Form 10-Q for the September 30th, 20003 quarter that will be filed next week to better understand some of the risks and uncertainties that may affect us.

Again, I assume you've all seen the press release and have it with you. I won't repeat all of that. Since our last conference call in early August, in general there's not been any significant change in our operations. I know that the press is talking about the market picking up, the economy picking up. I would have to say in most of our operations, things are pretty much as they've been for the last couple of years. No real sign of any significant pickup or on average, any pickup at all, although some of them are doing a little better, some maybe doing a little worse, so on average, I would say it's about the same.

Our established companies, QS Technologies and ChemFree, are both having record years, but we're not talking about big numbers in terms of increases. They are on target to make their revenue and profit plan for the year. The earlier stage companies, VISaer and CoreCard Software, are still reporting losses, which is also what we expected for the year. Both are making progress at finishing and installing their new software products at various customer sites although each company still has significant challenges to overcome to get to a sustainable cash-positive operation so.

So while there's some generally positive signs of activity picking up in the IT industry, we find that most small early stage software companies that sell complex software products like ours are still facing long selling cycles and scepticism from a more risk averse corporate market in the past. The most significant event in 2003 to date that affects our reported results is not related to our current operations. You recall that earlier this year a settlement was reached with First Data to resolve their claims, and we received $4.2 million in cash last March, and then a final payment of $281,000 in June. These amounts are included in the line of income for the nine-month period.

For the third quarter, we reported a loss of $2.4 million, or 53 cents per share. Year to date our loss was $3.6 million or 81 cents per share. The losses are significantly lower than we reported in the same period as last year even after taking into account the income related to the Escrow fund. The loss from operations for $2.5 million for third quarter was about $350,000 less for the loss reported for the same companies in the third quarter last year. As in prior periods, most of the loss from operations reflect R&D investment by our VISaer and CoreCard subsidiaries software products. I go into more details on each of these a little later, touch on some of the short-term factors that have affected or may affect these companies for the rest of the year.

At this time I'll let Bonnie Herron, our Chief Financial Officer, review the results of our third quarter and year to date in more detail.

Thanks, Leland. Our consolidated results for the third quarter and year-to-date period this year do include the same four subsidiaries as in2002, so the comparison between quarters reflect results of the same operating companies. Our Information Technology segment, you may recall includes QS Technologies, develops and sells software to public health organizations, VISaer, which is software and support in the maintenance, repair, and overhaul sectors in the aviation industry, and CoreCard which develops and sells software for financial institutions and retailers. Our Industrial Products segment includes ChemFree, which manufactures and markets the bioremediating parts washer system.

Consolidated revenue includes both our product revenue and service revenue. Total revenue for the quarter was $2.748 million, an 8% declined compared to $2.973 million in the third period last year. Of this amount, our product revenue, which includes the ChemFree product and software licenses, dropped 7% over the third quarter of 2002, and service revenue, which includes professional services and maintenance contracts, dropped by 9% compared to the same period last year. On a year-to-date basis, total revenue was up 19% compared to 2002, with a 24% increase in service revenue and a 15% increase in product revenue. These results include only a small amount of revenue from our CoreCard subsidiary which is not expected to recognize significant revenue until early 2004.

The year-to-date growth in product revenue is due to strong sales levels at the ChemFree subsidiary, due to increased demand for its parts washers with particularly strong growth in the European market and the large multifacility domestic customers. Year-to-date growth in service revenue reflects mainly a higher level of billings at the software subsidiary for professional services in the first half of 2003. And an increase at the QS Technologies subsidiary for annual maintenance contracts due to an expanding customer base.

In the third quarter of 2003, license and service revenue at VISaer was lower than in the comparable period last year, contributing to the year-to-year decline in third quarter revenue. At the end of September, our VISaer subsidiary has accumulated approximately $4.6 million in long-term deferred revenue, that represents payments made to VISaer for a new software product which will not be recognized as revenue until later periods, based on when the software is delivered and accepted by the customer. At the end of September, we also have $3.9 million in short-term unearned revenue, relating mainly to software licenses and maintenance fees that we will be recognizing within the next 12 months.

Our operating loss was $350,000 less than in the third quarter last year, and year to date our operating loss is $2.2 million less than for the nine-month period last year. The reduction in our operating loss is due primarily to a reduction in our consolidated operating expenses of almost $536,000 in the third quarter and $2 million in the nine-month period of 2003. We reduced our G&A expenses by eliminating duplicate expenses after the acquisition of CoreCard last year and we also reduced R&D expenses at both CoreCard and VISaer.

As Leland mentioned in his introduction, we have a major source of investment income in our year-to-date result related to the settlement of the PaySys escrow fund. This amount was not accrued. We had not accrued any amount after the original sale of PaySys, so all of the $4.5 million received in cash translated into a $4.5 million gain on the escrow settlement. Part of the investment gain was offset in the first quarter by a write-down that we previously announced of $719,000 related to our position in RS Solutions, the reduction of $76,000 in the carrying value of another software company in the second quarter, and a third quarter loss of $24,000 on an investment. And the net effect of the PaySys gain and these investment adjustments resulted in the $3.6 million investment income in the nine-month period.

This time we included a balance sheet in our press release in response to requests during an earlier conference call, taking a look at the balance sheet at the end of September you can see we had cash of $2.3 million, accounts receivable of $2.2 million, total assets of $16 million, and no bank debt. As mentioned a little earlier, a large component, approximately $8.5 million, of the liabilities on our balance sheet is made up of current and noncurrent deferred revenue.

Cash used to support the VISaer operations in the first nine months of 2003 was more than we had anticipated going into 2003. However, recently VISaer has worked with its largest customers to reschedule payments on a more balanced schedule, more periodic schedule during the balance of those contracts. If the customers fulfill their commitments, which we at this time expect to do so, VISaer's cash requirements for the foreseeable future will require little if any further investment from us, and we do not expect to continue to provide funding other than perhaps some very short-term receivables funding.

CoreCard has also required cash to operate this year, although it has installed its first customer and has a significant payment due in the first quarter of 2004. Last month, in October, we put in place a 1.5 million secured banking line of credit for working capital purposes. There are no borrowings under the line, but it is available to us with a borrowing base calculation that is tied to inventory and accounts receivable of our subsidiary companies.

At this point I will turn the call back over to Leland for some additional remarks.

Okay, Bonnie, just a little more about some of our subs. Let me start with VISaer. We continue to believe that VISaer is addressing a significant worldwide opportunity and the company appears to be in a good position tapping to that. They are building a strong pipeline of contracts and prospects international airlines, along with some domestic airlines and with third-party airline maintenance companies. We believe that their new software gives them a very, very competitive product offering and do not believe there are any competitors that can come close to what they have. However, they're really having some difficulty in terms of some of their large customers stepping up and giving them the cash they need to do what they need to do to get this product finished and installed. As Bonnie said, we've stepped up to the plate, and we're telling them we're not going to provide continued funding if the large customers do not step up with the cash that they have promised. We typically get a lot of promises and a lot of talk but we don't get the cash in on time and we think it's time that their customers follow through if they expect their investors to also follow through. So there could be some issues relating to VISaer going forward based on what customers decide to do.

The second company I'll talk about is CoreCard Software, the company that was spun off to PaySys shareholders at the time of the PaySys sell in 2001. We own approximately 87% of CoreCard at this time. We've made a lot of progress in the past year. We've installed in a couple of customers, one is a large customer. We're getting very significant kudos for the way the software is working, significantly better than anything they've had in the past, no big problems. It went live in less than 90 days from contract signing, which is a far shorter time frame than is typical of such product. That customer since we put out a press release, I can talk about is Fingerhut, and we believe they will be a strong reference customer for us and will recognize revenue on that contract in early 2004 when they make the final contract payments of over $1million.

We've also established marketing relationships in Asia Pacific and Europe to generate opportunities that may be a good near-term fit for CoreCard. However, we do not have our next customers lined up at this time. And, unfortunately, the fourth quarter of the year is a busy one for the most likely prospects, so while we're working hard to identify and sell our next customers, it's unlikely that significant progress will be made before early 2004.

The ChemFree sub is benefitting from some positive trends in the market for nonhazardous parts washers. Coming off a record year in 2002, the 2003 results are on plan for another record year in 2003 and have been bolstered by stronger international sales, a favorable product mix and a greater demand from large domestic corporations with multiple locations. So that sub is doing well.

Finally, our QS Technologies subsidiary entered 2003 with a solid pipeline of contracts awarded for implementation this year and also a good pipeline of prospects for public health software products. We expect them to be solidly profitable and cash-flow positive for 2003 barring any unforeseen delays in project implementation. This year QS has benefited by the award and implementation of projects that have been postponed in previous years by states. And given the reduction in state and local budgets, despite their significant pipeline of prospects, it's unclear at this point whether the same level of contracts will get the go ahead in 2004 or be postponed.

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 commitment to growing promising, early stage technology companies and to managing our company's internal processes and reporting requirements with honesty and integrity.

At this time let's open up the lines for any questions you might have.

At this time I would like to remind everyone in order to ask a question, please press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Ken Wash of SIIA.

Hi, Leland. Hi, Bonnie. I've listened on your calls for the last year and a half or more with great interest, but I've never asked you a question, I mean, I don't think I have. In any event, the question is that it seems to me that you've got some huge challenges with the two large investments in VISaer and CoreCard. With an opportunity, the way you're describing it, looks to me that ChemFree is generating the cash that can then support further development of both VISaer and CoreCard. If I'm reading between the lines in your comments, that if VISaer isn't able to get some significant new customers, shortly, you're going to be faced with a choice of either shutting the subsidiary down or selling the business.

Similarly, CoreCard, with a great demonstration at Fingerhut, looks promising, but as you've indicated, the next group of customers are not yet in sight, so you're faced with a stark choice there as well. We were saved, we as shareholders, were saved to some extent with the settlement this year on the -- what was the name? The $4.5 million settlement from the PaySys shareholders. Is there another influx of cash other than drawing upon the line of credit that's going to be able to fund additional losses unless you're able to sell off these two businesses in the next year?

Let me approach it from several angles. One, the idea that we're faced with huge challenges I will agree with, but that's what we've always been faced with. Our business really is dealing with promising businesses. So that's what we've always done, and VISaer and CoreCard are, as you characterize them, promising businesses rather than established businesses.

Second comment is ChemFree really is not throwing off lots of cash. ChemFree is using their money to continue to grow. They end up financing their receivables through the cash profits they generate, so it's not throwing off a lot of cash.

Then the third, you mentioned the Visibility would need new customers. That's really not the issue, Visibility has a customer line up, they have a pipeline. What they need is for the customers they now have to pay for the progress we're making on their software and installation in a timely basis rather than billion dollar companies expecting us to finance their business while we do all of that. So it's a challenge of getting companies to pay the cash at a time that we needed to pay for the payrolls for the work they're doing for these companies. We don't think sales are the problem.

Yes, we'll always be faced with some stark decisions as we always have. And yes, although I don't want to go into details, there's always the possibility we certainly know where they are, of other good events happening along the way, along with potential difficult decisions to be made on VISaer and CoreCard. But business is no different than it's always been. The challenge for VISaer is, will the customers step up and pay for the work we're doing for them in a timely manner, rather than stretching it out, and we're talking about millions of dollars here. And for CoreCard the challenge is finding another large customer to step up.

Thank you, Leland. Thank you.

Your next question comes from Sam Robotski of SER Asset Management.

Yeah, hi, Leland. Hi, Bonnie. Last conference I was busy and I couldn't participate. So with the appearance you have the deferred revenue and it appears not much will come into the fourth quarter, as you indicated, so presumably there will be a loss again in the fourth quarter, and the possibilities of goodwill write-down. What's the possibility that we'll have to sort of write off the goodwill and basically have a negative equity?

Well, I don't think that's a possibility unless something dramatically happens at VISaer, which I'm not expecting. If we can count on what the customers say they're going to do, then we're okay. If customers don't do what they say they're going to do, then, yeah, we can have that. But we're not planning on that, and from a loss situation, yes, we expect to continue pretty much as we are now with QS making money, ChemFree making money, VISaer not being profitable, and CoreCard not being profitable.

So do we -- the short-term deferred revenue, that will be taken in over the next year, is the bulk of that to be -- not much is going to come into the balance of 2003, and is any of this revenue going to take place in 2003?

Some of it will come in in 2003, primarily that's what QS has on the books. The VISaer revenue will not come in in 2003, not in significant amounts. I can't really quantify the amount, but, yes we'll have some come in from QS but not the big dollars. The big dollars are still out there for completion of contracts on VISaer.

And the long-term revenue, which means it's over a year, will that come in in 2004?

Possibly all could come in in 2004. Again, it depends on the project plan for some of these customers. They're indicating they'd like for it to be installed completely in 2004, but at the same time they're talking about maybe some of it has to get delayed a little later. So that's not under our control, but it's possible it will all come in in 2004, but it would be toward the latter part for the big dollars.

And you have all the cash, you've received all the cash on the deferred revenue, or is any of it being carried in accounts receivable?

Hold on just a minute, let me check here. I think we've received, again, we've received a majority of the cash that's in deferred. The receivable will be very low, it would probably be in QS. We did not do any deferred for CoreCard. We really don't like to put that on unless we're absolutely required, so we try not to be aggressively showing that.

So your position at this point, not being willing and able to put additional capital, would you consider any joint ventures, I'm sure you have people that might want to joint venture with these two corporations, or is there any thoughts on what another approach would be if it was a cash crunch?

Yeah, we've approached it from a lot of angles. We're working a lot of angles, and for me to say I won't put any more, remember, I qualified that. I will not put any more unless customers step up and do what we think they should do.

Sure. Yeah, that's clearly understandable. Now, the ChemFree, what kind of sales are you generating and profits are you generating on ChemFree, and is this a 100% subsidiary? I don't recall.

We don't really want to break out the specific number for competitive reasons.

Okay.

I will tell you ChemFree revenues are between $5 and $10 million just to give you a magnitude, and profits are decent for that size company.

And you own 100% of ChemFree?

Yes.

Okay. Now, what is the front -- are you selling a chemical, or are you selling no chemicals?

Well, we sell a bioremediating parts washer and we sell fluid, which is a chemical, an aquose-based, water-based chemical that's used to clean the parts in the parts washer

And which parts are we cleaning with this?

Any kind of mechanical, auto dealerships, it's a parts washer.

So these are for auto parts only, 100%?

No, no. A lot of industrial plants use them for any kind. Be it cleaning equipment, any plant that uses parts washers to clean small parts.

Okay. And it's not computer chips and that type of stuff?

No, it's industrial, mechanical things.

Okay. Is there any thought on spinning it out, taking it public, merging it with another company?

We have thoughts about doing all of the above, all the time with all of the subs.

Okay. But have you discussed with anybody, whether it's investment bankers or other corporations?

We discuss these things, again, I'm going to be blanket, all the time, for all the subs. So don't be surprised if we own it three years from now, don't be surprised if we announce a sell three months from now.

Okay. And you're limited on making other investments based on the fact that you have limited capital available.

Right. We do some very limited things, but we're certainly not doing anything major.

So are there people that you could be a finder for a transaction, if people come to you and is there anything like that that you do?

Not for any remuneration. We obviously have our network that we trade things with.

Okay. Well, hopefully something will happen that will make everybody happy.

Likewise.

Okay.

Thank you.

Again, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. One moment for further questions. Your next question comes from Jeff Rothenberg of Moss and Rothenberg.

Good morning. In listening to calls from, perhaps a year or so ago, it seemed like 2003 was the year that the VISaer revenues were anticipated as being received, and I'm wondering what the delay was in. It was my understanding that monies would be paid when certain milestones in preparing the software were achieved.

There were two delays. Obviously, the airline industry continued to experience significant slowdown, and they stretched out because of their cash and the way they were doing business, they stretched out their desire to do new things. That's number one. The second thing is that we fell behind in our software development. So both of them kind of went side by side, or in tandem that decreased the revenues. Bonnie? Go ahead.

We also had some increase in scope of the contract which increases the overall value of the contract but it pushes out when, in fact, it would deliver all of that. And so you don't recognize any of the revenue until the full deliverable is made.

One of the companies that I thought was involved in wanting to develop this software and then use it was UPS, and I could be wrong, I thought maybe you all had mentioned that awhile back, and UPS really hasn't been affected by the general airline industry. I mean, it's a growing big company and it seems like a few million dollars to a company like that would be insignificant.

Well, I have to laugh on two things. I'm also dealing with other companies with people like General Motors, and let me tell you, seems like not a few million but a few hundred thousand becomes significant, or 50,000 to everyone of these guys. But that being said, the UPS contract has increased in scope, as Bonnie said. They're wanting us to do more, which we're doing, so therefore it all goes into deferred revenue until you get the completion of the contract, which would not happen until late 2004 or early 2005. And the more that the scope increases, the longer it will take to be able to recognize this.

And one last question. Other than their -- what seems to me as like helping you pay for the development of the software and whether they make their payments on time or stretch the payments out, or increase the scope of the work and don't come up with the money to cover the increased costs of developing more detailed software, what is the income stream that comes from a business like this? In other words, once they pay for the software and start using it, are there monthly fees that these people pay, or, what's the nature of the business?

There are annual maintenance fees that are fairly significant, but let me say UPS has been a great partner in helping us both define the product for the airline industry as a whole, it would be, I think, pretty obvious that they would prefer to have a product that is accepted by the industry as a whole, so that you share continued development, so they've been a great partner in that. And we have some other very large airlines that we're involved with, and not only make the first sale, but you continue to have professional services, as well as maintenance revenues, and they continue to add seats as we call them, where they continue to pay new license revenues as they add more people using the product.

I guess one last question. I read on your website that companies like Jet Blue, China Air, there's a small Dutch company, and perhaps a company in the Azores, that are already using the product, and I guess my question is, are the products so different that what they would use for MRO is that much different than what the freight company would use it, so that if the product is already out there working, what would take so long to get it working for other airlines?

No one is using in full the new web browser-based product. This is where the industry needs to go and where they're going, so they can, any time, anyplace, get into this and see what's going on. But the airlines you mentioned, no one is using the full-blown browser-based software. In some cases they're using some older version of the software, in some cases they're using a stripped-down early version of the browser-based software, but we have not completed the full-blown browser-based version of the software, which is the one we expect to really take off.

I guess one last question. Once that's done, is there one of the companies, like I'll just say UPS, that would just want to use it for itself, its proprietary software to gain some type of advantage over the other airlines or competitors, or once it's done will it be open to the entire airline industry and because they helped pay for it they would somehow share in the profits from that?

Well, quite the opposite in terms of keeping it proprietary because the problem with historically people doing that, we have another company very similar, and that's a credit card, the CoreCard Software, most large companies today realize the benefits of having many companies using standardized software. It dramatically lowers their cost in the future of changes, mods, maintenance, and everything else, and no one wants to take this on by themselves. So I can say that there's no airline that we're talking to that would like to make this proprietary. They obviously would like to be in the lead and get it first and introduce it early and get some first to market advantages, but they want everybody else to share the cost and burden of keeping it updated out in the future.

So they're not looking to share in future profits from what they help develop?

I don't remember the exact contract, but that's certainly not their goal. There may be some payback for certain portions, the truth of the matter is, I don't remember the exact contract, but, no, they're not our partner in terms of wanting to make a lot of money on the software.

So as I understand it the final product then might not be anticipated to be in use until 2005?

Well, that's UPS, that may be their full implementation, again I'm not aware of exactly what their implementation is. But we should have the final product ready and going in first quarter of 2004.

Okay. Great. Thank you very much.

Okay.

Next we have a follow-up question from Sam Robotski of SER Asset Management.

Hi. Is there any thought about raising any funds from stockholders or private placement or rights offering or anything if you come down to the point that you might need additional capital, even though you set up a million and a half dollar standby bank loan?

That's one of the things we haven't spent any time thinking about or discussing. I don't think that will be the case.

Okay. So you feel that, for the next year you should be able to sort of get by one way or another without doing a private placement, and I presume, though, that if you wanted to do a private placement, you might make it available to stockholders also, or?

Well, I would guess you would, but I have to tell you, we've given no thought or had no discussions regarding that, so that should tell you a little bit about how we feel about cash going forward even though we recognize what the numbers show and why there should be, someone might have some concerns, but we've given no thought to doing that.

Well, that's good. All right, good luck again.

Thank you.

At this time there are no further questions. Mr. Strange, do you have any closing remarks?

Thank you for taking the time to listen in, and we're just going to continue to do what we've been doing and hopefully come up with some successes in 2004 for everyone. Thank you very much.

Thank you. This concludes the Intelligent Systems third quarter earnings conference call. You may now disconnect.