CoreCard Corp (CCRD) 2004 Q1 法說會逐字稿

Good morning, my name is Tamara and I will be your conference facilitator today. At this time I would like to welcome everyone to the Intelligent Systems first-quarter earnings 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. (OPERATOR INSTRUCTIONS)

Thank you. Mr. Strange, you may begin your conference.

Good morning and welcome to the Intelligent Systems conference call and live webcast. We will probably make it short this morning as we usually try to do since you have the press release and the other information. But we will discuss financial results for the first-quarter and try to update you on some recent events and give you some idea of our outlook for the future. I plan to follow the same format that we usually do. I will start with some opening remarks and then Bonnie Herron, our CFO, will go over the financial results. Then after that, I will come back and give you some more color commentary and open up for any questions you may have.

Before we start, let me remind you that this call -- or during this call I will likely make what could be characterized as forward-looking statements. And in doing that, we are relying on the provisions of the Private Securities Litigation Reform Act in providing this information. I will be doing that based on my current assumptions and information that we now have available to us. Obviously that can change over time and therefore the results can change. You might want to read our Form 10-Q that will be filed at the end of this week to better understand some of the risks and uncertainties that might affect the company.

Again, assuming you have all seen the press release that we issued this morning and have it with you to refer to I won't repeat all of those numbers. We're going to try to use this time to provide some additional explanations and other financial information and answer questions that you might have. It has only been two months since our last conference call in March and at that call, I think finally I said I was somewhat optimistic whether we had just had flat feeling about where we were going. And I would say that at this point, I am probably slightly even more optimistic although cautiously so, since we have a little better visibility of the customer prospects and potential contracts.

I am not sure whether this better outlook reflects really an improving economy or is more directly related to the fact that our products and companies are slightly further along in development and more mature than in the past. Our established (ph) companies, QS Technologies and ChemFree both had a solid start in 2004 after having achieved a record year in revenue and profit 2003. Also in the first quarter both VISaer and CoreCard Software made good progress on completing their latest Web-based software products and expanding their installed base of customers as well as their pipeline of new business prospects.

Financially compared to the first quarter of last year, we made significant progress reducing our losses from operations although again I don't place much credit or blame on those things since a lot of it has to do with the way you have to do your accounting. I think due to a number of factors beyond our control, principally related to the timing of recognition of revenue in future periods, it is unlikely that we will achieve the same level of year-to-year improvement in the remaining quarters of 2004. Although business might actually be better, the numbers won't show it.

I will go into more details on the progress and status of each our companies a little later in the call and give you the factors that affected our results in the first quarter and those that we believe will continue to impact us during the rest of a year. But first, before we do that I will ask Bonnie Herron to review the results of our first three month period of 2004 in more detail.

Our consolidated results for the first quarter of this year include the same four subsidiaries as we had in 2003; so that the comparison between the first quarter of this year and last year reflects the consolidated results of our three information technology and software subsidiaries; QS Technologies, VISaer and CoreCard Software and our one industrial product company, ChemFree.

You saw from the press release our consolidated revenue includes both product revenue and service revenue and a total revenue for the first quarter of 2004 was 4,612,000 a 45 percent increase compared to 3,170,000 in the first quarter of last year. Of this amount our product revenue which includes sales of ChemFree product as well as software license fees at our software subsidiaries, increased 89 percent over the first quarter 2003 and our service revenue which is made up of professional services and maintenance contracts at our software subsidiaries dropped by just about 6 percent compared to the same period last year.

The main reason why are revenue grew by 1.5 million in the first quarter of 2004 compared to last year is mainly due to the fact that CoreCard Software recognized revenue from its first significant customer installation during the quarter after a very successful implementation that the Fingerhut Direct Marketing Company. This boost in software revenue which also carries a relatively low cost of sales contributed to an improvement in our gross margin to 61 percent in the first quarter of 2004 compared to a gross margin of 43 percent in the first quarter last year.

In addition, you may remember from earlier conference calls that we have accumulated a significant amount of deferred revenue that will be recognized in future periods as we deliver related software and services to our customers. At the end of March, our VISaer subsidiary has accumulated approximately 5 million in long-term deferred revenue and we also have 3.3 million in short-term of unearned revenue relating mainly to software license and maintenance fees that will be recognized by our software subsidiaries in the remaining three-quarters of 2004. A number of factors will impact the timing of the revenue recognition by quarter as Leland commented on. And many of these factors such as our customers internal implementation or testing schedules or some seasonality that may affect their business are outside of our control. So it is not possible for us to predict with great certainty in which quarter a particular contract will be recognized.

In the first quarter of this year our operating loss was 837,000 which was 1.7 million less than in the first quarter of last year. Again, mainly because of the increase in the high margin software license sales at the CoreCard subsidiary combined with some reduction in consolidated marketing and G&A expense.

From our earlier calls you may also remember that we had a major source of nonrecurring investment income in the first quarter of last year related to the settlement of the PaySys escrow fund which contributed to the positive net earnings last year because it offset the 2.6 million loss from operations. We did not have any investment income to report in the first quarter of this year.

Taking a look at the balance sheet, at the end of March you can see that we had cash of 770,000 and accounts receivable of 2.1 million which is up from 1.5 million at the end of December. As mentioned earlier, a large component, approximately 8.3 million of the total liabilities on our balance sheet, is made up of current and non-current deferred revenue which represents the value of software or services that we will deliver to customers and recognize as revenue in future periods.

Our current deferred revenue increased by a net amount during the quarter of $680,000, reflecting mainly payments by Jet Blue Airlines, one of VISaer's customers during the quarter for software that we expect to deliver in the near future and recognize as revenue in the second half of the year. In addition, the final payments on the Fingerhut contract were received during the first quarter.

In the aggregate, the cash used for operations in the first quarter this year was less than half of our reported loss for this first quarter. In the press release today we also disclosed any events that occurred after the quarter ended that has had a positive impact on our cash position. Earlier this week on May 10th, we closed on the private sale of our investment in Cirronet, a privately-held technology company in an all cash transaction totaling $1,073,000. We will record a gain on this transaction in the second quarter of 2004.

Our original investment in the Cirronet stock was 525,000, but our reported gain will be a little less than that because under the equity method of reporting, we had picked up part of Cirronet's earnings during certain periods when we held the stock so that our carrying value is actually higher than our actual cost of that investment.

We've also reported before that we have in place a $1.5 million secured banking line of credit for working capital purposes. And there are no borrowings under the line at this time but it is available to us. We could use it periodically to smooth out any consolidated cash flows if necessary. We believe at this time that we have adequate cash and other sources of liquidity to fully support our current plans and operations.

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

Let's look at our main subs and just give you a couple comments on those. As Bonnie mentioned earlier, our ChemFree sub had a solid start to start to 2004. Domestic revenue was up 4 percent over a strong first quarter in 2003. We expect 2004 to be a good year for a ChemFree but it is probably unrealistic to expect to achieve the same level of double-digit growth as we did in 2003, especially in international markets. But I do think they will continue to be a slow, steady performer.

The QS Technologies sub is also coming off a very strong year 2003 and its first quarter was close to plan. Just a little bit of slippage in revenue from the first quarter to the second, mainly due to customer schedules. That is also a revenue recognition issue as to how you apply that.

Early in the second quarter, QS learned that it has been awarded a significant statewide contract for one of its newer products which we view as a good indication that its products are meeting the market requirements. Most of their contracts are with state and local governments and generally take 9 to 12 months to complete. Fortunately they also have a large install base of customers that purchase annual maintenance and support contracts and this provides a consistent level of service revenue and positive cash flow on an annual basis.

Our last two subsidiaries are VISaer and CoreCard are software companies that share a lot of features in common. They perhaps have the most potential among our companies to have significant increases in value over the next few years but they are also much riskier in the near-term and more difficult to predict. Both made excellent progress in 2003 and also in the first quarter of 2004. They both have Web-based software products and are building strong relationships with their first significant customer for these products. They are very similar. In addition, they both address large, worldwide markets with very comprehensive, very complex software solutions that we believe are strong competitive offerings.

Both of them also sell high dollar value products and services mainly to large customers with long buying cycles. And both CoreCard and VISaer face the sometime difficult task of convincing prospects to purchase mission-critical software from early stage companies with limited installations, operating history and limited cash.

On our last conference call in March, I believe I said that I thought VISaer was at the cusp of becoming a very good company delivering the best industry specific software solution for the aircraft maintenance and engineering market worldwide and that the ongoing support of its largest customers would be instrumental in helping to define its future. I also said that with this customer support and the increased procurement activity in VISaer's target markets, VISaer can lead forward. But even without that support, we believe that VISaer could develop a sustainable business although at a much slower pace and it would be a little more difficult or take a longer time to achieve its potential. I continue to hold that view.

Beginning in late 2003, VISaer focused its resources on completing the first full version 3 software for installation at customer sites in 2004. The first such major customer Jet Blue Airlines has been an outstanding development and financial partner in this process. We expect to deliver their software in the near future. This will represent a major milestone for VISaer and its new productline. We're also working on an amendment to our existing contract with UPS that has been VISaer's largest customer that we believe will create a reasonable basis for both parties to move into the next phase of their contract. It is not complete, but we have high hopes that we will have a good contract for both parties and will help both of us.

VISaer also has contracts with several other national airlines such as Qantas, and Ranchelli (ph) and other third-party maintenance providers which will generate professional service revenues as well. It is a challenge for any small company when dealing with large or international firms because it often takes longer than planned to negotiate and implement contracts and this makes predicting and managing cash flow very difficult for VISaer, at least in the short-term. However, they are tightly managing their expenses, they've identified a growing base of business with its current and new customers and we have been able to significantly reduce the ISC cash investment in the past two quarters as compared to the same periods last year.

In summary, I believe VISaer has more visibility now than in the past with respect to revenue opportunities and depending on the kindly support of its customers and prospects it is either on the edge of accelerating into a product and market leadership role or perhaps going to a less dynamic but nevertheless, a sustainable operating mode.

CoreCard faces some of the same challenges as VISaer although it does not yet have the same level of prospects and customers as VISaer. It is a little newer in the marketplace and only attended its first U.S. trade show a week ago.

As Bonnie mentioned earlier, CoreCard recognized its first significant software license revenue in the first quarter this year with the successful completion and payments on their contract with Fingerhut Direct, a direct to the consumer marketing company that is using our software to manage its accounts receivable in a very fast-growing industry. Fingerhut has been an excellent business partner and will be a strong reference for our next customer prospect. We are presently in negotiation with several other large customers and we expect to choose one of those to basically take care of our resources through the last half of this year.

We are at the point where we couldn't even deal with more than one large customer at a time if we had that opportunity today. We are in the position of picking of who we are going to work with for the next six months and hope to have that finalized in the next week or so.

Now that we have a strong referenceable customer, we are incrementally stepping up our marketing efforts to identify several more target prospects for CoreCard, thinking in terms more of next year. Because CoreCard sales will tend to be a high dollar installation, it only takes a couple to make a big difference and made the companies dynamics in a significant way.

In closing, let me say that we will be filing our Form 10-Q at the end of this week and I would encourage you to read the additional information in that document for a more complete understanding of the Company. Also remind you that our annual meeting of shareholders is scheduled for May 27, at 4 PM in Norcross at which time we expect to have a very short business meeting, dealing on with the election of one Director to the Board of Directors.

At this time, we will open the lines up for any general questions you might have.

(OPERATOR INSTRUCTIONS) Ken Wash (ph) with SIIA Software (ph) .

A very good presentation. I look forward to it every quarter. The question I asked last meeting I guess two months ago was whether the stockholders equity would go negative. It seems to me that given the continued cash requirements at CoreCard, until a second or third customer comes along that prospect is real. Because you have got -- not that that is necessary the worst thing in the world, but the stockholders equity you are reporting right now is 226,000; without this Cirronet sale, it is likely or it is possible you would have gone negative in this quarter. Is there anything else you can sell -- any other minor investments you can sell to make sure that while CoreCard continues to require a substantial amount of continued investment that stockholders equity doesn't go negative?

Well, the Cirronet sale -- it took place in the second quarter, not the first -- so the cash at the end of the first quarter was not impacted by the Cirronet sale but the stockholders equity in the second quarter will be impacted positively by that sell.

I'm aware of that.

What I said was I didn't expect it to go negative. I will say the same thing now. It is possible it would -- so I won’t make an absolute statement that it won't, but yes, there are other things on the horizon and we're taking these as pretty much business as usual. We feel no compulsion or no panic to have to look for cash. As you said, you would rather not have a negative stockholder equity but there are worse things and the worse thing from the way I look at it would be to make bad business decisions to avoid that. We are not at all concerned about cash -- so therefore we're not going to make a bad business decision to keep it from going negative, although while saying that, I still don't expect it to happen, but it could.

What is the current monthly run rate expenses at CoreCard?

I don't think we are breaking those out and Bonnie, you will have to tell me --

We have not broken out individual subs -- because frankly you're looking at the consolidated company and cash flows we have always --

Everybody is rooting for CoreCard to get some additional customers but in the event that the second and third customer don't appear pretty soon --

I can alleviate you. The issue is not the customer; there is still a cash flow issue when you get the customer because it is back-end loaded in terms of getting your cash. But getting the customers is not going to be the problem; we are okay there. We are in good shape there. I can't announce anything but we are in good shape there from several vantage points.

Good to hear, thank you.

Norm Grooms (ph) , an individual investor.

Congrats on your progress; it sounds like it is across the board. I have some questions about your subs. With ChemFree. Is anyone offering a competitive product with similar benefits? Is anyone developing one? Assuming it innovates only incrementally, roughly what annual revenue would you like to see ChemFree attaining in five to ten years?

We don't report specific revenues of specific subs for lots of competitive reasons. To your first question, I'm going to always assume that someone is going to be offering a product of similar benefits no matter what business you're in. There is no way to get a complete circle around a total exclusive. We think we have some real advantages which is why we are making progress in the marketplace. But yes, there are competitors.

With regards to the revenue. I'm not looking for specific revenue now or even in the next few years but just ballpark over the next 5 to 10 years? Does ChemFree enter the 10 million, 20 million, 50 million? What do you consider its realistic opportunity?

I would say it should be growing at least 10 percent a year and its current revenue is between 5 and 10 million. It should grow at least 10 percent a year, ongoing.

And the market size is considerable?

It is very large, very large. There is no capital market size. The cap is -- it is not really cap -- the governmental regulations are do industries decide to get let's a clean washer versus staying with the old volatile mineral springs washers. There's millions of them out there.

Okay, thank you. I will try to hang up and recall to ask another batch of questions. Thanks again.

(OPERATOR INSTRUCTIONS) Norm Grooms.

Thanks for taking the question. I have three initial questions about CoreCard. What is the extent of first (indiscernible) rights to CoreCard software? If you would, how would you quantify CoreCard's addressable market before and after its competitive restrictions fully expire? Who do you deem CoreCard's strongest competitor over the next few years?

Your first question was does First Data have the right? First Data has the right to use the base underlying development at CoreCard. However, it would be very painful for them to take that and turn it into a product at this point in time. We have moved so far away from that in the last few years. So they have no rights to anything that they didn't have at the time of the divestiture. Number one.

Number two was CoreCard's major competitor. It is a difficult question because in the U.S. you're really competing with processors such as First Data and Total Systems. And trying to get the people to go in-house, insource, rather than outsource, so it is not a particular company offering the same thing. No one is really offering what we are offering in the U.S. That is a complete system on a PC environment that is scalable. There is one other company offering it, maybe two on mainframes.

Internationally there is several companies offering a version of software similar to what we have. We think less robust. The major competitor internationally would be considered a company called Cardtach (ph) out of the UK. They are way ahead of us in terms of market share and developed product. We think we have a better product, so we will be coming up behind them with what we think will be a much better product over the next few years. I forget what your second question was?

That sounds good. Just how you would quantify the addressable market before and after your competitive restrictions expire.

I don't want to really want to put numbers on it. I think everybody knows that the market for processing cards is very, very, very large. So the choice is between -- do they go with a very large processor such as Thesis (ph) and First Data or Certegy or PhiServe or do they do it themselves. If they do it themselves, it is a gigantic and huge market.

Is there a difference -- substanant difference in the market opportunity before and after 2006 given the deal with First Data?

The market opportunity is actually big enough now. It's really the constraint today is us getting our software even better. It runs fine but we have to go deeper and deeper in terms of product with ATM cards, gift cards pushing loyalty. The market is pretty big now. I think what is happening is again it is our ability given the fact we're not going to spend millions and millions of dollars chasing something. We are going to take it step-by-step and one reason we're taking it step-by-step is because some restrictions do expire in 2006 at which time we could process ourselves or make a deal with a processor which we think will definitely increase the value of the Company significantly.

Great. I will hop back in queue for perhaps just one more go.

Why don't you just go ahead.

Okay. In that case, is your -- are your annual corporate expenses now running between 1 and 1.5 million?

That would be on the low end.

They are slightly below one million.

Wonderful. I think you expected QS and ChemFree to continue to generate cash sufficient to offset most of that. Does that mean capital expenditures that they generated somewhere between a half million and a million in 2003 and are expected to do similar this year?

I will let you make that assumption from the numbers, not a bad analysis but I will let you make that assumption.

Good enough. Thanks also for the nonpromotional nature of your reports.

As everybody knows, we don't pump anything and promote anything. We just try to tell it the way we see it and move on.

Thank you.

At this time, there are no further questions. Are there any closing remarks?

No. I appreciate the questions. I think it helps us define what we do a little bit more. I apologize for not being able to be more specific in certain areas but I think everyone understands that when you have small companies, that there are people that listen in or people that want to know more about where we are headed and what we are doing. And when you are still small, you want to keep some of that close to the vest for comparative reasons and when you get larger, it is a little easier to let it out because it comes out anyway.

So thank everyone for being on the call and if you have any further questions that we can answer without getting in trouble with our CPAs or our lawyers, please call Bonnie or I. Thank you.

This concludes today's conference call. You may now disconnect.