CoreCard Corp (CCRD) 2003 Q4 法說會逐字稿

Good morning. My name is Brooke, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Intelligent Systems fourth quarter and fiscal year earnings conference call. (Operator Instructions). I would now like to introduce Mr. Leland Strange, President and CEO. Thank you. Mr. Strange, you may begin your conference.

Good morning. Welcome to the Intelligent Systems conference call and live broadcast. During the call we plan to discuss financial results of our fourth quarter and annual periods ending December 31, 2003, and highlight some of our future plans. We issued a press release this morning with our financial results, and you may want to have that available for reference. In fact, we will assume that you have that in this call.

We will follow the same format we usually do. I will give you a few opening remarks and then turn it over fairly quickly to Bonnie Herron, our CFO, who will go over the financial results. After that I will come back with some comments and maybe some color commentary. And then we will open it up for any questions you may have. The call is also being webcast and will be archived for twelve months, if you wish to repay it. You can access that from our website, www.intelsys.com.

Before we start the lawyers want me to remind you that during this call we will likely make what could be called forward-looking statements, and we're relying on the provisions of the Private Securities Litigation Reform Act in providing this information. The information is based on our current assumptions and the information available to us now. And we know that that is very likely to change as time goes on. So you should read our Form 10-K report that will follow the end of March to better understand some of the risks and uncertainties that we face.

Again assuming you have all seen the press release, I will not repeat all of the information and the numbers that are contained in that. That means the call may be a little bit shorter than normal. I want to use the time to generally explain or provide additional explanations and other non-financial information, and answer any questions that you may have.

Since our last conference call in November in general there has not been any significant change in our operations. Our established companies, QS Technologies and ChemFree both had record years in revenue and profit, with QS Technologies having an unusually strong fourth quarter. Our earlier stage primary companies, VISaer and CoreCard Software, are still reporting losses, which is what we expected for the year. And they are making good progress at finishing and installing their new software products, although each company still has challenges to overcome to get to a cash positive operation. And we will talk a little more about those later. As in prior periods, most of the loss from operations reflects R&D investment by both VISaer and CoreCard in their new software products. Again, we will go into more detail a little later.

At this point, I would like to ask Bonnie Herron, our Chief Financial Officer, to review the results of the fourth quarter and annual periods in more detail. And then I will come back and talk about the business.

Our consolidated results for the fourth quarter and year to date improved the same four subsidiaries as in 2002, so the comparison reflects improving results at the same operating companies. As you may recall, our Information Technology Segment includes our QS Technologies, VISaer and CoreCard Software Software subsidiaries, all of which are involved in software products, and our industry product segment company is ChemFree.

Our consolidated revenue includes both product revenue as well as service revenue. Total revenue for the fourth quarter of 2003 was 4.6 million, a 36 percent increase compared to the 3.4 million in the fourth quarter of last year. Now these amounts are product revenues which includes sales of ChemFree products, as well as software license fees at the VISaer and QS, increased 84 percent in the fourth quarter. And our service revenue, which includes principally professional services and our maintenance contracts at the software subsidiaries dropped by 16 per cent compared to the same period.

On an annual basis total revenue was up 24 percent to 13.3 million, compared to 10.7 million last year, with a 34 percent increase in product revenue and 10 percent increase in service revenue. These results include only a small amount of revenue from our CoreCard subsidiary, which will not recognize revenue from its first major customer sale until the first quarter of 2004.

Year to date growth in product revenue is due to strong sales levels of a ChemFree subsidiary, reflecting increased demand for its part washers, with particularly strong growth in the European market and at large multifacility customers in the U.S. Our QS Technologies subsidiary also had a record level of software license sales in the fourth quarter, which contributed to a particularly strong and profitable mix of product revenue. They benefited from the pent-up demand from state and local governments, which we think it's unlikely to be repeated at the same level in 2004 as budget cuts at state and local levels begin to take effect and impact new software procurement.

Year-over-year growth in our service revenue reflects mainly an increase at QS Technologies subsidiary in billings for annual maintenance contract, because it now has a larger customer base, as well as more revenue from installation and training related to the new software installations during 2003.

At the end of December, a VISaer subsidiary had accumulative approximately 5 million in long-term deferred revenue that represents payments for their new software product which will not be recognized for another twelve months. And they also have -- we also have about 2.6 million in short-term unearned revenue that is on our balance sheet as a liability that will be recognized by our subsidiaries in 2004, mostly related to software licenses and maintenance fees.

In the fourth quarter our operating loss was 675,000, which was 1.8 million less than the fourth quarter last year, and mainly because of the record level of high margin software license sales at QS, combined with a reduction in operating expenses.

On an annual basis, our operating loss was 4 million less than for the twelve month period last year. This 33 percent reduction in operating loss as compared with last year is due mainly to achieving a 24 percent increase in revenue, while reducing our consolidated expenses by 13 percent. We reduced our G&A expenses and R&D expenses both by 16 percent in the aggregate.

From an earlier conference call you may remember that we had a major source of investment income earlier in 2003 related to the settlement of the PaySys escrow fund, and all of that was recognized as income. The 4.5 million received in cash was 4.5 million gain on that escrow settlement. Part of this investment gain was offset in the first quarter by a previously announced write-down of 719,000 against our carrying value of RF Solutions.

And in the fourth quarter of this year we took a charge of 632,000 against the carrying value of our minority position in a company called Mediviz (ph). This was a particularly disappointing result because the company, which had developed a proven artificial intelligence software tool to assist radiologists in interpreting mammograms, simply ran out of time and money as it became bogged down in the FDA bureaucracy. So the net effect of the PaySys escrow gain and the inventory adjustments yielded net investment income of just over 3 million for the twelve month period.

Taking a look at the balance sheet at the end of December, you can see that we had cash of 1.1 million, receivables of 1.5 million, and total assets of 14. As mentioned earlier, a large component, in fact, approximately 7.6 million of our total liabilities on the balance sheet are made up of current and noncurrent deferred revenue, which represents the value of software services to be delivered to customers and recognized as revenue in future periods beginning in 2004.

Cash used to support our VISaer operations during the course of 2003, as we discussed earlier, was more than we had anticipated going into 2003. However, in the fourth quarter of the year they were able to reschedule payments with two of the largest customers on a more even schedule for the balance of those contracts, which resulted in a significant reduction in the funding that we had provided to VISaer since then. As a result, assuming that these customers continue to fulfill the commitments, which we presently expect them to do, VISaer's cash requirements for the foreseeable future will require little, if any, further investment from us.

CoreCard also required cash to operate in 2003, although it installed first customer in 2003 and received a significant payment in the first quarter of this year already. Last October we put in place a 1.5 million secured banking line of credit for working capital purposes. At this time there are no borrowings under the line, but it is available to us with a borrowing base calculation tied to inventory and receivables. And we expect to use it periodically in 2004 to smooth out our consolidated cash flow. We believe we have adequate cash and other sources of liquidity to support our current plans and operations.

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

Let me spend a little more time looking at the progress and prospects of each of our four subsidiaries. First, the two established operating subs. ChemFree had a record year with a 37 percent increase in international shipments and a 15 percent increase in domestic revenues. The growth was fueled in part by stronger demand in Europe, more sales and leases to multifacility customers in the U.S., and a favorable product mix with higher margins sales of filter and fluid supplies to ChemFree's installed base.

While we expect 2004 to be a good year for ChemFree, it is probably unrealistic to expect to achieve the same level of double-digit growth, especially in Europe. So I foresee a slower, but steady continued growth in ChemFree.

Our QS sub began 2003 with a solid pipeline of contracts awarded for implementation in 2003, and as a result QS had a solidly profitable and cash positive year in 2003, with over 50 percent of its software license revenue coming in the fourth quarter when it delivered a number of new software licenses.

In 2003 QS benefited by the award and implementation of projects that have been postponed by state and local governments in prior years. Given what appears to be renewed constraints on many state and local government budgets for 2004, we expect that it will be difficult to achieve the same level of software license revenue in '04, because these entities may postpone purchases by key products pending an improved revenue outlook in their jurisdictions. Fortunately, QS has a large installed base of customers that purchase annual maintenance and support contracts, and this provides a consistent level of service revenue and positive cash flow. So the base business is very good, and QS is in solid territory.

Our last two subs, VISaer and CoreCard, are earlier stage software companies that share some features in common. Both made excellent progress in 2003 on their Web-based software product. And they are both building strong relationships with their first significant customers for these products. Both address large worldwide markets with very comprehensive, complex software solutions that we think will be strong competitive offerings over the next many years.

Both sale high dollar value products and services mainly to large customers with long buying cycles. And both CoreCard and VISaer faces sometimes difficult tasks like convincing prospects to purchase mission critical software from early stage companies with limited installations and operating history. Even though Intelligent Systems has a history of investing in these types of companies, and of successfully bringing this type of software to market, we understand why large corporations hesitate sometimes until they get a good handle on our history. Both VISaer and CoreCard sustained losses in 2003, which were expected because under GAAP accounting software revenue is deferred until 2004 or later, plus significant R&D expenses were recorded in 2003.

Specifically, I will talk about VISaer. VISaer, we believe, is right at the cusp of becoming a very good worldwide company. And the ongoing support of its largest customers will be instrumental in helping to define its future. With this customer support, and what appears to be increased procurement activity in VISaer's target markets, VISaer can leap forward. Without that support, VISaer can still develop a sustainable business model, but it will develop more slowly and will take longer to achieve its potential of delivering the best industry specific software solutions for the aircraft maintenance and engineering market worldwide.

In 2003 there was still considerable weakness in the commercial airline industry for a number of reasons, and when combined with the impact of the SARS epidemic, it resulted in VISaer using more cash than we had planned. As a result in fourth quarter of 2003, VISaer decided to focus its resources on implementing current contracts, and reduced its sales and marketing expenses, while obtaining agreements from some of its major customers for periodic payments, rather than milestone payments.

The Company is actually focused on completing the first full Version 3 software for installation at Jet Blue Airlines in 2004. Jet Blue obviously is a very successful airline. It has been an outstanding and flexible development and financial partner with VISaer in this process. We expect to continue that wonderful relationship.

In the near future we will be able to deploy more development resources to the next phase of the product evolution. And we are looking to other VISaer customers to help support us in that. One of the customers that we have mentioned in the best is UPS. We have received no revenues from them the last few months, and they are rethinking their approach to this industry. We are hoping that they will decide to continue to go with us. We provided good software. They have been a good partner historically. But even if they do not, and we have no assurance that their decision-making would go in our favor -- even if they do not, we feel we will have a good successful company. It will simply take us longer to get there. And those decisions will be made very shortly as to how we proceed.

There are other national airlines such as Quantas and Lan Chili, and a number of smaller airlines and third party maintenance organizations that would generate license and professional service revenue for the Company as well. Assuming that its customers continue to follow through on the planned payment schedules, and that VISaer tightly manages its expenses to match cash flows, VISaer operation should require not as much cash from us this year as last year.

VISaer continues to win business from prestigious airlines around the world. And as it weathers the short-term cash challenges, it can potentially emerge as a strong contender in a large growing market. In summary, I believe VISaer is on the edge of accelerating into a product and market leadership role. And I believe it will happen either short-term, if we get good support from certain customers, but it will happen long-term if we just continue with the same model we're working on now.

CoreCard faces some of the same challenges as VISaer, although it does not yet have the same level of prospects and customers as VISaer. CoreCard is the company that was spun off to the PaySys shareholders at the time of the PaySys sale in 2001. We've made a lot of progress in the past year. As mentioned before, CoreCard signed its first significant software license with Fingerhut Direct, a direct to the consumer marketing company.

They are using our software to manage its accounts receivable in a very fast-growing industry. They selected our CoreIssue, a private label credit management and payment processing system, and CoreCollect, a credit management tool to manage the Fingerhut credit portfolio. They successfully went live on our software in less than 90 days from contract signing, which is a far shorter time frame than is typical of such projects. It was able to handle a high volume of credit transactions using our software driven the Christmas retail season. They have been an excellent business partner, and we will recognize the revenue related to this contract in the first quarter of 2004. The final software license payments of over $1 million have already been made in 2004.

Overall we're not seeing any big uptick in software purchase in our market. And we do have to contend with the fact that sometimes customers will choose to outsource their card systems, or choose an older, less flexible technology rather than buy from an early stage company.

We've established relationships with marketing partners in Asia-Pacific and Europe. And now that we have a referenceable customer, we are cautiously stepping up our marketing efforts to identify several private label card prospects for CoreCard. We've also introduced a Fleet Card program, and are talking to prospects about that particular software. And we're working very closely with Hewlett-Packard in the Asia-Pacific region with their buyings.

Although we have not -- although we have made some progress, we do not have our next customers really lined up at this time. However, because CoreCard sales will tend to be high dollar installation, it only takes a couple to make a big difference and changes the Company dynamics in a big way.

We do have investments in some other companies that are private companies. We are minority shareholders. And because of the nature of these investments, we don't talk about them more specifically, I think for reasons you can understand. But we do have other assets other than these four subsidiaries.

Let me say in closing that we will be filing our Form 10-K before the end of March. And we intend to mail our annual report and proxy statement in mid-April in advance of the annual meeting of shareholders scheduled for 4 PM on May 27th. I would encourage you to read the additional information and disclosures in both of those documents for a more complete understanding of the Company.

Now we will open it up for any general questions that you may have.

(Operator Instructions). The Al Shams (ph) with Midsouth Capital.

It sounds like we have made some good progress. I was just curious, are we at a point where you think you might monetize any of your investments in any of these four subs?

I think I would answer no. You can never tell. If someone gives the right price, it could happen tomorrow, but I would say that we're not looking at any of these four subs at this time to monetize.

Your thinking as to continue to build process and kind of revisit that point later?

Yes. We don't think they are at the right point to give the return that we should get based on what we have invested at this point.

(Operator Instructions). Ken Wasch with SIIA.

It sounds like you're making some good progress, but there is one thing I noted in the balance sheet was that the stockholders' equity was down to just a little over $1 million? Do you anticipate that in 2004 that we will actually go negative with stockholders' equity?

No, I do not anticipate it will go negative.

At this time there are no further questions.

Okay. We thank you for being on the call. And as always, if you have questions that we are able to answer -- as you know under the current Securities law we have to be somewhat careful, but if you have the kind of question that you feel like that we're able to answer privately, we will be happy to take your calls for any further discussion. So thank you very much for being on the call today.

Thank you. This concludes the Intelligent Systems fourth quarter and fiscal year earnings conference call. You may now disconnect.