CoreCard Corp (CCRD) 2004 Q4 法說會逐字稿

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

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

Okay, thank you, Star. Good morning, and welcome to the Intelligent Systems quarterly conference call. This call will be a little different and shorter than some of our previous calls, mainly because there's simply not a lot of news that you either haven't already been told about on our last call in November or that you have read about in our press release today.

So we are going to focus primarily on a management update rather than repeating information you already have. And we will leave some time at the end for any questions you might have in case we left something off that you would be interested in.

The call today is being recorded and will be posted on our website at www.intelsys.com by the end of today and will be archived for 12 months if you wish to replay. Before we start again let me remind you that during this call, we will likely make what could be called forward-looking statements. We are relying on the provisions of the Private Securities Litigation Reform Act in providing this information, which is based on the current assumptions that we are making and the information that is currently available to us. What we actually achieve could and probably will be very different from our current plans for a variety of reason, and we're not obligated to update you on changes that may occur. You should read our Form 10K-SB that we will file at the end of the month to better understand some of the risks and uncertainties that may affect us.

I assume that you have seen the press release that was issued this morning and have it with you to refer to. Basically, the fourth quarter was very much in line with our expectation. And the results for the full year reflect the positive impact of several significant transactions that we discussed in the third-quarter call that relate to the VISaer sub and also the ISC Guernsey asset sell.

While we are pleased to report a profit for the quarter and year, I am mindful of what I've said in the past about the unpredictability of our quarterly results on a quarter-to-quarter basis and the fact that our revenue and profits are likely to continue to fluctuate substantially. Much of the timing of software revenue recognition is determined by customer timeframes, activities and acceptance processes; although, some of it is dependent upon our software development activities and delays that we may be responsible for.

But as a result of this mix of things, we are going to continue to make our business decisions based on the realities of the market, our customer requirements and requests, and the long-term best interests of the Company rather than on timing or impact of these decisions on our quarterly financial results. I would go into more details on the progress and status of each of our Companies in a few minutes. But at this time, I am going to ask Bonnie Herron, our CFO, to review briefly the results of the fourth quarter and full year.

Thanks, Leyland. Our consolidated results for 2004 include the results of our three information technologies subsidiaries -- QS Technologies, VISaer, and CoreCard Software and are one industrial products subsidiary, ChemFree.

So just briefly looking at the fourth-quarter figures first in the income statement and the press release, total revenue for the fourth quarter of 2004 was 4 million compared to 4.6 million last year. And the decline is mainly due to the fact that our QS Technologies subsidiary had a very strong fourth quarter in 2003 with over half of their annual revenue falling in the fourth quarter. Whereas this year in 2004, their revenue was spread out more evenly over the year. And so, we didn't see the same spike in the fourth-quarter this year. And this period-to-period comparison and the sort of distortion simply reinforce Leland’s comment on the impact of software revenue recognition timing on our reported results.

In fact, all of our software subsidiaries reported more service revenue in the fourth quarter of 2004 than in 2003, reflecting a larger installed base of customers, who pay us for professional services and annual maintenance and support.

Our expenses in each category were lower in the fourth quarter of 2004 than in the prior year, as we continue to focus on managing expenses and cash. The other item of note in the fourth quarter was 1.2 million of investment income. And that reflects a second cash distribution that we received from the ISC Guernsey asset sale and the recognition of the final deferred gain from a VISaer product line sale in 2000. Both of those took place in the fourth quarter and contributed to those results.

As you read in the press release, the full year results for 2004 were in fact dramatically different than those of the prior year. And much of the growth in revenue and profitability is due to the recognition in the third quarter this year of $7.5 million in revenue and almost 5 million in gross profit margin on the completion of a multiyear software contract at our VISaer subsidiary. And we already talked about that in length during the third-quarter call. However, even without this significant single contract, our annual consolidated revenue grew about 11 percent in 2004 with the bulk of that growth growing in the service revenue. Again, due to the fact that our software subsidiaries have larger installed bases of customers that pay us annual maintenance fees, and we also had a number of new contract at our subsidiaries that involved more professional services than in the prior year.

ChemFree also had year-over-year growth in its product sales, particularly strong in the international markets.

In addition to the revenue that we recognized in 2004 at the end of the year, we have on our balance sheet net deferred revenue of approximately 4.9 million. And this amount reflects payments from various customers that we expect to recognize as revenue in the next 12 months when we have completed delivery of the associated products and services.

The investment income of 2.5 million for the year includes the two cash distributions from the ISC Guernsey sale and other investment gains and reserves that are explained in more detail in the press release and that we already talked about in prior conference calls.

At the end of 2004, our financial position shows an increase in shareholders' equity to 3.6 million compared to just over 1 million at the end of 2003. We anticipate that our share of additional distributions from the proceeds of the ISC Guernsey investments will be between 1.8 million and 2.1 million during 2005. Our established subsidiaries, QS and ChemFree, are profitable and cash positive. And both CoreCard and VISaer will use considerably less cash in 2005 than last year. And looking forward, we're comfortable with our cash resources and availability under the bank line.

We had just completed the annual audit with our new auditors, Tauber & Balser, and expect to file our Annual Report on Form 10K-SB at the end of the month. The transition from our former audit firm to Tauber & Balser was very smooth, and we have been extremely pleased with the level of service and expertise received.

As a non-accelerated filer, we fall into the category of companies that have been granted a 1-year extension by the SEC on the date for compliance with the requirements of Section 404 of the Sarbanes-Oxley Act that relates to internal controls. We were already well underway on the project, and our plan is to simply continue with that implementation although at a more moderate pace. And the 1-year extension will allow us to manage the cost of such a large project by doing much more of the work internally, rather than relying on outside consultants.

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

Okay, thanks, Bonnie. Let's talk about each of the primary subs in a little more detail, starting with ChemFree. ChemFree did have another solid year with continued growth particularly in the international markets, and also it did a fair number of multiyear lease contracts with large corporate customers. The growth was solid. It is not dramatic. But it is a slow, steady growth. ChemFree did incur significant legal expenses plus considerable management time last year, as a result of some legal litigation regarding the patents. We think a lot of that is behind us.

On the other hand, going forward, we will be persistent and devote adequate resources to continue to try to protect the value of ChemFree's intellectual property, which includes 11 U.S. patents and almost 30 others issued or pending in U.S. and foreign jurisdictions. Clearly, other competitors are trying to use these patents in their business, and we will continue to incur some legal expenses to try and protect those. We do think that ChemFree will continue to be a solid, steady performer for us.

QS Technologies continues to be a profitable, cash positive business with 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 on an annual basis; although, its license revenue will fluctuate from period-to-period and even year-to-year, since the contracts take a period of time to install. QS has over 20 years of experience in their public health and vital records market. They are well respected, and we expect they will continue to make a solid contribution to our results particularly this year.

VISaer continues to make progress in completing and delivering the best web-based industry-specific software solution for their aircraft maintenance and engineering market worldwide. Its largest customer just went live on the first phase of a multi-year implementation, which will likely involve additional professional services from VISaer. After a lengthy and somewhat delayed product development and quality testing process, VISaer has delivered a new release of its web-based Version 3 software to several customers including JetBlue Airlines and several smaller airlines. VISaer expects its next release a little later this year will be the go-live version for a number of its current and prospective customers. JetBlue has been an outstanding development and financial partner in this process. VISaer has recently signed a multiyear contract with China Southern airlines as well as several smaller domestic and international customers and has a pipeline of professional services work and add-on license revenue with its existing base of customers.

Dealing with large and international firms and selling software that is a critical component of the customers' operations often takes longer than planned to negotiate the contracts, to deliver, to install and test. And this makes predicting cash flow very difficult at least for the short term.

In summary, I believe VISaer has the right product offering for the market, and the market continues to improve both domestically and internationally. Our emphasis in 2005 will be on executing on current contracts, earning great reference accounts, refining some of our internal development testing processes, and efficiently managing our professional services work. If we do these well, then I think VISaer will be going into 2006 with a great future. But '05 will be one of simply consolidating what we have and making sure we do a good job of what we have.

And lastly, 2004 was an important year for CoreCard, as it recognized its first significant software license revenue and also earned some professional services and maintenance revenue. We are working on our next significant contract for a private label software license and implementation similar in size and scope to our first Fingerhut project. While we don't have a pipeline of contracts sitting there, we do have some several smaller ones in negotiation. And the volume of prospects continues to build with almost no marketing effort.

We expect to step up marketing efforts the next few months but will continue to be reasonably selective about the number and types of new customers we take on in the near future so that we can devote adequate resources to these key early installations. We have expanded our offshore technical resources to speed up testing and development activities at a lower average cost by having employees based in Romania and Indiana, which we believe is a key component being able to meet the requirements for timely, price competitive product offerings in both the domestic and emerging international markets.

In closing these brief remarks, let me just reiterate that you should read our full Form 10K-SB for a more complete understanding of the Company. We will be mailing it to you in early April, or you can access it on our website at the end of March when we file with the SEC.

At this time, we will open the lines to see if you have any specific questions about any of the remarks.

(OPERATOR INSTRUCTIONS). Martin Rosenman (ph).

I have two questions. The first is -- when does the CoreCard non-compete agreement expire?

Well, it is a variable. It has expired -- different things expire at different times. The final expiration will be the end of next April, April 2006.

And what expires before that?

This year in April, the expiration or the provision that excludes us from selling to PaySys' customers expires -- I think that is end of April this year. And next year, everything expires.

Okay and the overall stock market has shown increased interest in mergers and acquisitions. Has there been any interest in purchasing any of your Companies?

We are constantly talking to potential buyers of each and all of our subs. And I cannot go into any more detail than that.

Norm Guns (ph).

It is a pleasure to hear your updates. A few questions -- Bill Goodhew is listed in your proxies as an executive without compensation. Does he -- held by being a voluntary capacity? And what subs are he involved with part-time or full-time?

Okay, Bill Goodhew actually is compensated, but he is under the minimum level that is required for reporting, which I believe is around 60, 75, $90,000. So he's taking less than that because he is not working full-time. He helps us with both marketing, deal finding. He works with our small Companies in terms of being a senior adviser. So he is reasonably active, but I would not say he is full-time.

Okay, thanks. I read some nice things about you both so that inspired the question. I noticed Paymetric was new among there, given their acquisition of, I think, it was Riverside. I noticed some of their managers include PaySys folks. What is your stake in Paymetric? And what is the extent of competitive overlap between Paymetric and CoreCard? And are they also employing any former CoreCard employees?

Okay, let me also just tell everyone, we did receive -- and thank you for sending ahead a copy of some of the questions you were going to ask. I appreciate that. The answer on Paymetric is that we own a very, very small stake. And I don't know the exact percentage. They bring some additional money from Austin ventures; I believe it is $7 million. And that's probably a preferred issue, which will be significantly above ours. So we are a minority shareholder in Paymetric.

They do have some ex-PaySys employees with them. They are not people that came from us after we split off from PaySys back 4 years ago. They never worked for us, but they worked for PaySys before the split off and before the purchase of First Data or at the time of the purchase of First Data.

So let me think, the other part of your question -- there's no.

Competitive overlap.

There's not really an overlap. I guess potentially we could do the same thing. We look at it more as Paymetric may be a customer and probably will be a customer for CoreCard Software.

I was wondering about that, okay. I guess one more question before the last one I wanted to ask you. And that's on -- you mentioned you stepped up development offshore in Romania and India. About how many folks are you employing or have working for you on a full-time equivalent basis?

An approximate number is about 20 in Romania and about 10 in India.

Okay, and then the last question -- I was hoping you might expound a little bit on your experiences with PaySys and CoreCard and just in general, perhaps to give us some insight into the future of the card management. What attracted you to PaySys? What PaySys does particularly well? What it could have done better in retrospect?

And looking forward, how you envision card management, commercial and retail dividend credits -- card management evolving over the next few years? And whatever thoughts you are willing to share, I would be delighted to hear.

Yes, that's a big question. And I am smiling. I don't think I would be considered or recognized as an expert in how the card system is going to evolve over the next few years. What we try to do is just try to make sure we have a platform and an engine that could react and be useful at however it evolves. So I really don't have any opinions there. I read probably the same as you, but I do not have the opinions as to how many checks you are going to have versus how much electronic payments and that sort of thing.

We are hoping obviously that the kind of engine we have will encourage some folks to do more things on their own, rather than go to the large processors. Our business strategy doesn't require that to be the case to be successful. We think there are plenty of those, but we are hoping that becomes a trend, which is counter to the trend that we have seen for the last 10 years. I wouldn't bet big time on that. I just do not know. It is an evolving business, and we just want to be in a position to move wherever it goes.

I think the key that PaySys did well early on and what we're trying to follow this time is that you try to be the low-cost model as far as the software provider. So PaySys, they do it on mainframes, but they did it cheaper than what the other guys could do it. And we are doing it on Wintel platform, and hopefully it will provide the lowest cost. Because my view in any of these market is that if we are the lowest cost provider then we can react to whenever happens in the marketplace. So rather than trying to predict the marketplace, I just want to be in a position to move however it should move. It is no easier to predict that then it is the stock market. And we know what kind of trouble we get in when we try to predict that.

Gene Reilly (ph).

Current deferred revenue approximately 4.9 million -- how would you allocate that between VISaer and CoreCard?

Current deferred revenue --

You know, it is a combination actually of all of our subsidiaries. For instance, even ChemFree has a little bit of deferred revenue related to lease customers that is recognized over the course of that lease payment. QS has some deferred revenues. So while it is predominantly VISaer, there are also components from all of our subsidiaries in there.

So what percentage of it would be VISaer?

I don't have -- I do not think we want to break it down in that degree. But I would say probably 50 percent of it is VISaer.

Yes, I think just as total, you would probably say 50 percent is VISaer, and the other is broken up maybe half and half. Well, there are three, so it is kind of broken up in smaller pieces. VISaer would have the preponderance of it at this point. There are other tracks at CoreCard --

Right and it will change over the course of the time during the course of the next year. As CoreCard meets milestone payments, they will have a larger percentage of that deferred revenue until they can go live with their next major implementation.

So the bulk though would be VISaer followed by CoreCard and QS Tech?

Well, not right now, CoreCard would not be -- may not be the (multiple speakers).

Yes, CoreCard is not the largest component of that.

But it will be by the end of the year.

Right.

(OPERATOR INSTRUCTIONS). At this time, there are no further questions.

Okay, well, we thank you for joining us on the call. And if you have specific questions that we'd be able to answer without violating some of the SEC rules, we are always happy to take your call. Again, thank you for being on the call today.

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