CoreCard Corp (CCRD) 2004 Q3 法說會逐字稿

Good morning. My name is Bonnie 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. (Caller Instructions.) Thank you. Mr. Strange, you may begin your conference.

Good morning and welcome to the Intelligent Systems Conference Call. During this call, we will discuss the financial results of our third quarter of 2004 and also update you on some recent events and our outlook for the future.

We'll follow the same format that we usually do in these calls. I'll start with some opening remarks and then Bonnie Herron, our CFO, will go over the financial results. After that, I'll come back with some more comments and we'll open up for any questions you may have.

Just to let you know, the call is being recorded and will be posted on our website, www.intelsys.com, by the end of the day. It will be archived for 12 months if you wish to replay it.

Before we start and I take care of the legal preamble, let me remind you that during this call we will likely make what could be called forward-looking statements. We're relying on the provisions of the Private Securities Litigation Reform Act in providing this information and the information is based on current assumptions and information 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're not obliged or obligated to update you on changes that may occur during the quarter. You should read our Form 10-QSB that will be filed at the end of next week to better understand some of the risks and uncertainties that may affect us.

So in opening remarks, let's--I assume you've seen the press release issued this morning and have it with you and I won't refer to all of those numbers. Often I think I sound like a broken record when I say that although we lost money according to GAAP, things are really not that bad. Well, in this case, I'm gonna still sound like a broken record with something a little different when I say that we made money and a lot of it according to GAAP, but things are really not that good. So often they're not that bad and in this case they're not that good.

Last quarter on our conference call, I discussed several transactions that we expected to include in the third quarter financials and that would result in an unusually high level of revenue and profit for the quarter. As you can see from the press release that's exactly what happened. We are pleased that the $7.4 million in defered revenue, $4.9 million in deferred gross profit associated with VISaer subsidiary's contract with UPS was finally reflected in our financial results. Although, as I mentioned in the press release, you should not interpret this as a trend, in fact it was the culmination of a multi-year software project for which the customer had made almost all of the contract payments in earlier periods. However, it is certainly a milestone for VISaer even as they are focused on bringing the completion of their new customer projects.

The other positive contributor to third quarter results was the recognition of just over $1.5 million in investment income related to the previously discussed sale of the U.K.-based company of ISC Guernsey, an entity in which we are a minority investor. We received a cash distribution of $1.5 million during the quarter and expect additional cash distributions over the next several quarters depending on what they decide to do with some of the business. In the next several quarters we may get anywhere from $2 million to $3 million. That asset is on our balance sheet for $31,000.

This quarter's results are a good example of what we've often said about the unpredictability of our quarterly results on a quarter-to-quarter basis and the fact that our revenue and profits are likely to fluctuate substantially. Much of the timing of software recognition is determined by customer time frames, activities, [unintelligible] processes, although some of it, of course, is dependent upon our soft--our own software development activity.

As a result of this mix, we have found it is not reasonable or an efficient use of resources to try to manage these contracts on a quarterly reporting basis, but rather, we will continue to make our business decisions based on the realities of the market, our customer requirement, and long-term best interest of the Company, not on how we handle the accounting treatment.

Our established companies, QS Technologies and ChemFree, both entered this year after a record year of sales and profits in 2003. They both expect to finish 2004 with another solidly profitable year, although again, the specific timing of some of QS' installations since their software are scheduled for the fourth quarter, but they're not under our control, so that could slip.

Both VISaer and CoreCard made good progress in the development of their latest web-based software product and also in expanding their installed base of customers and new business prospects. I will go into more details on the progress and status of each of the companies a little later in the call and touch on some of the factors that have affected our subsidiaries and companies' results in the third quarter, and those that we believe could impact our operation for the balance of the year. But first, I'll ask Bonnie Herron, our CFO, to review the results of the third quarter and the year-to-date period--year-to-date in a little more detail. Bonnie?

Thank you, Leland. Our consolidated results for 2004 include the same four subsidiaries as in 2003, so we are--the comparison between the three and nine-month periods of the two years reflects the same subsidiaries and that includes our three information technology subsidiaries, QS, VISaer, and CoreCard, and our one industrial product subsidiary, ChemFree.

Our consolidated revenue includes both product revenue and service revenue. As reported in the press release, the total revenue for the third quarter was $10.4 million, a 279 percent increase compared to $2.7 million in the third quarter of last year. If we eliminate the $7.4 million related to the VISaer contract that accounted for almost 70 percent of the quarter's revenue, the third quarter revenue would have been approximately $3 million, which would have represented an increase of about 9 percent compared to last year's third quarter.

Of the $10.4 million in revenue for the quarter, our product revenue, which includes sales of ChemFree products as well as software license fees at VISaer, CoreCard, and QS Technologies, was $2.5 million more than in the third quarter last year. And service revenue, this includes professional services and maintenance contracts at our software subsidiaries, increased by $5 million compared to the same period last year.

On a year-to-date basis, revenue was $18.4 million compared to revenue of $8.7 million in the nine-month period last year. Adjusting for the VISaer contract revenue, our year-to-date revenue would have been approximately $11 million or 26 percent higher than in the same period last year. The main reason for the growth in product revenue during the third quarter was due to the VISaer contract. And in the year-to-date period, we also benefited from the first significant customer revenue earned by our CoreCard subsidiary.

The growth in service revenue in the quarter and year-to-date period was led again by VISaer, but also supplemented by increases in service revenue at both our QS and CoreCard subsidiaries, reflecting the fact that our software companies have larger installed bases of customers that pay annual maintenance fees. And we also had a number of new contracts that involved more professional services than in 2003.

In our last conference call, I talked about the significant amount of deferred revenue that was reflected on our June balance sheet that would be recognized in future periods. And as expected, we did move approximately $4.9 million of our net deferred revenue off the balance sheet and into earnings this quarter. At September 30, we continue to have net deferred revenue of approximately $4.7 million, reflecting a number of payments from various customers that we expect to recognize in the next 12 months.

Compared to last year, we reduced our operating expenses by 10 percent in our continued focus on expense control while growing our revenue base. As explained in the press release during the third quarter, we recorded a net investment gain of $1.7 million, and of this, approximately $1.57 million was related to the ISC Guernsey cash distribution and the balance from the sale in early 2003 of an interest we held in a privately-held company, RS Solutions. By comparison, in last year's year-to-date results, we have a major source of non-recurring investment income related to the settlement of the PaySys Escrow Fund, which we have talked about in the past calls.

Turning to the balance sheet for a moment, we have an improved financial position as of the end of September compared to the June 30 balance sheet, reflecting mainly the profitability of the quarter and the events already discussed. At September 30, cash stood at $1.2 million and stockholders equity is at $3 million compared to a negative equity of $2 million at the end of June.

As Leland mentioned, we are informed and expect that we are likely to receive additional cash distributions related to our shares of proceeds of the ISC Guernsey investment and they could--that could be between $2 million and $3 million over the next six months or so. For the exact amount, the timing depends on the current business days for the U.K. company as well as the foreign currency exchange rate. We renewed our $1.5 million bank line of credit in late September and presently do not have any amount outstanding under the line.

Looking forward, we are comfortable that our cash resources and availability under the line will be adequate for our current plan.

At this point, I'll turn the call back over to Leland for some more remarks.

Okay, Bonnie. Thanks. Let's talk about each of the subs as we usually do. On ChemFree, their revenue is up modestly on a year-to-year date--year-to-year--sorry, year-to-date basis with a slight slow down in third quarter that reflects some seasonal weakness in the European markets. While we do expect 2004 to be a decent year for ChemFree, it's unrealistic to expect it to be the same level of double-digit growth in the last half of '04 as was experienced in '03. They did have one positive development in the quarter and actually reduced its legal expenses in the future and enhanced the bottom line. A recent agreement related to two lawsuits that have been ongoing for many, many years related to patent litigation. As a result of the agreements, ChemFree received the full assignment of the disputed patent in return for payment over the next five years. There was a settlement. The value of the assigned patents of approximately $445,000 is being amortized over the remaining ten-year life of the patents. ChemFree has incurred legal expense of over $300,000 annually plus considerable management time and effort on these matters, which we expect to be put to better use in the business going forward.

That having been said, we do expect to have to continue to basically protect our patents around the world over time, so we will have some ongoing legal expense.

The QS Technologies sub also came off of a very strong year in 2003 and has won considerable new business this year, including a significant statewide contract for one of its newer products. We view this as a good indication that its products are meeting the market requirements although they're not likely to contribute to 2004 results. Most of their contracts with the state local government generally take nine to 12 months to complete. Again, the timing of revenue recognition on software licenses is often difficult to predict due to a number of factors outside QS' control. Fortunately, they 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.

The VISaer subsidiary is making progress in completing and delivery what we believe is the best web-based industry-specific software solution for the aircraft maintenance and engineering market worldwide. Beginning in late 2003, VISaer focused its resources in completing the first full web-based version of its software for initial delivery to customers in 2004. The first such major customer of the web-based solution is Jet Blue Airlines and they've been an outstanding development and potential partner in this process and we expect to deliver a major release of the software in the near future although revenue recognition will not place--take place until sometime in 2005.

The completion of the UPS contract has also created a reasonable basis for VISaer to do additional professional services work for them in 2004 and beyond. VISaer also has installations at several other national airlines such as Qantas and Land Chile, and other third-party maintenance providers, as well as other prospects in the process of final negotiation. We expect these will generate new license and professional service revenues as well.

It's always a challenge for any small company when dealing with large or international firms because it often takes longer than planned to negotiate and impliment (ph) contract, this makes predicting and managing cash flows very difficult, certainly in the short-term. However, with their experienced management team continuing to tightly manage its expenses and identifying a growing base of business for their current and new customers, we believe the future is bright.

In summary, I believe VISaer has more visibility now than in the past with respect to business opportunities. The quality and timeliness of its product development and software deliveries will be important to permanence of when and to what extent we can turn these opportunities in to the bright future we see.

As we've reported before, CoreCard recognized its first significant software license revenue of approximately $1.3 million in the first quarter of this year with the successful completion of its contract with Fingerhut Direct. Fingerhut has been an excellent business partner. It has been a valuable customer reference source for us and we continue to do additional professional services work for them. They've now been [unintelligible] on our software for over one year and are very, very pleased with the installation and with the application.

In the third quarter of this year we also signed another significant private label customer for a software license implementation that's similar in size and scope to the Fingerhut project which we expect to implement within the next six months or so. We are incrementally and slowly stepping up our marketing efforts to identify several more target prospects [unintelligible], but we do expect to continue to be reasonably selective about the number and type of new customers we take on in the near future so that we can devote adequate business resources to these key early installations.

We are expanding our offshore technical resources to speed up testing and development activities [unintelligible] lower average [unintelligible] with employees based both in Romania and India. Which we believe will be a key component to being able to meet the requirements for timely, price competitive product offerings for both domestic and emerging international markets.

As Bonnie, discussed earlier in the call, the Guernsey investment and sales transaction (ph) had a significant positive impact on our liquidity and operating results, and we do expect additional contributions over the next few (ph) quarters. This investment was a pleasant upside surprise that certainly exceeded our expectation. It just reinforces (ph) how it is difficult to predict the results on a quarter-to-quarter basis or why we do not publicly try to place a future value on our minority [unintelligible] and private companies.

In closing, let me say that we'll be filing our Form 10-QSB at the end of next week I would encourage you to read the additional information and disclosures that are in that document for a complete understanding of the company and its risks. Now, we'll open the lines for any specific questions you may have about the quarter. Operator, go ahead and open the line.

(Caller Instructions.) Your first question comes from the line of Ken Wash.

Hi, Leland. This is Ken. As a veteran of these calls, I've watched with great interest the developments in CoreCard. And initially, you were spending two--you know, $300,000 a month in development costs. Development costs largely appear at this point to be behind us. What you haven't indicated is--I understand that we may get a new customer, a new significant customer beyond Fingerhut for CoreCard, but how the--how are the ongoing monthly expenses running for CoreCard? Are they gonna be likely to be ratcheted up or down on the next six months?

We're not likely to have much change either way.

How many employees do we have there at this point?

You know, I--for competitive reasons I just don't want to put out each of the specifics, because we do have competitors that listen to the calls and look through our things. But I think, we've said in the past, there's roughly 50 folks working [unintelligible], both in the U.S. and overseas.

I do understand your reasons for not going into that. I appreciate that.

I would surely like to have that information on some of my competitors and I can't get that either.

That's fine.

Your next question comes from Noel Gruen.

Hi. Good morning. Congratulations on finding a second CoreCard customer. I have several questions. Why don't you stop me when you'd like me to hop back in queue? First, would you kindly provide an update on your percentage ownership of investment in and loan outstanding to each subsidiary and equity affiliate?

The answer is no. The information that we file publicly in writing is all the information we'll give out on that. We will not do anything else orally.

Okay. About a year ago, I think you issued a press release that said the Fingerhut implementation validated $35 million spent on product development since the 1990s. It looks like [unintelligible] are in the--just in the five years ended December 2000, totaled about $60 million. How did you arrive at that $35 million figure?

We estimated that this was the amount that was spent on the kind of--on the technology that we are using for CoreCard.

Okay. Now that it's been a year since Fingerhut has gone live, do you believe anyone has or could spend substantially less than $35 million to develop comparably functional software?

You know, that's a hard question. It obviously takes--it obviously takes less money to do something a second time than it does the first time.

Right. Just having been in the market--marketing it for a year now, to your knowledge, is there anyone who can go head to head with you?

There's always--there is always in every marketplace competitors that can go head-to head on some basis. Obviously, our job is to try to convince folks that ours is better and we're in a better position. There are plenty of people that offer less and there are plenty of customers that probably would pay less to get less. So it's not like there's a marketplace there that's free for us.

All right. I'll leave it there. Thanks, and I wish you both a lovely holiday season.

Thank you very much.

Your next question comes from Stan Lebosky.

Yeah. Good morning, Leland and Bonnie. So as far as the profitability of this quarter, can we--and we're expecting $2 million to $3 million on the ISE over the next six months. Do we expect to be profitable with the ISE in the fourth quarter or going forward? What's our, you know, prognostication there?

Well, again, we're not prognosticating in terms of the profitability. We have no control over when we get the proceeds from Guernsey. That's their management deciding based on other business opportunity. We've given you our best guess that we're likely to get that--Stan, it's my best guess, not their estimate, that we're likely to go ahead and get that in the next six months, and that might be all that we get out of that. But I'm--again, that's my guess. But I really don't want to prognosticate P&L at this point. Obviously, the other--I think we would assume that VISaer--the way we're able to count (ph) revenue and CoreCard the way we're able to recognize revenue are not profitable in terms of revenue recognition. That leaves you a ChemFree slightly slow and QS slightly slow, so on balance, we would not be profitable with the distributions and we're not--and we don't control the distributions.

Okay. So at this point, we--even though this quarter because we are able to book the big diferred revenue, we would be profitable without the ISC. But since we don't have that kind of deferred revenue going forward, or expect to book it, we don't see profitability on a quarter-to-quarter basis unless we really book some big revenues?

Yeah, that's correct. See the same thing will happen although we've--I think we've indicated we've signed another good contract with CoreCard, we will not be able to book that revenue until--and although we get some cash along the way, we will not book that revenue until we're totally complete on the contract sometime next year.

Okay. And as far as your cash requirements right now--with the ISC you seem to be okay. Are there any thoughts to needing cash in the next year or so?

No, there are none. I think we're--as I said a year ago, and some people were worried, we're very comfortable where we are with the cash.

Okay. And as far as the IPO market, which has improved a bit although it's not, you know, gangbusters, how far are you away for an IPO for any of your subsidiaries?

It's not something we're discussing now. Obviously, the IPO market requires I think a stronger bigger company now than they used to require to do that also. So it's not even something that we're thinking about. We're just trying to manage the Company at this point.

Okay. And as far as sort of any kind of transaction at this point, you're just presumably just gonna develop these companies until their value--is a greater value and then, instead of merging or anything like that with any larger companies, I assume?

I think that would be the path.

Well, good luck.

Thank you.

At this time there are no further questions.

Okay. I want to thank everyone for being on the call. We will be filing next week. If you have other questions that we are allowed to answer, as I look at Bonnie, who is saying be careful here. If you have any questions that we're allowed to answer legally given current rules, feel free to call us. We're happy to talk to you. So thank you very much for attending.

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