CoreCard Corp (CCRD) 2005 Q1 法說會逐字稿

Good morning. My name is Michelle, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Intelligent Systems first quarter earnings release conference call. After the speakers remarks there will be a question-and-answer period. [OPERATOR INSTRUCTIONS] As a reminder, ladies and gentlemen, this conference is being recorded today, Thursday, May 12, 2005. I would like to introduce Chief Executive Officer, Mr. Leland Strange. Mr. Strange, you may begin your conference.

Good morning. Welcome to the Intelligent Systems Corporation quarterly conference call. This call is likely to be somewhat shorter than even previous calls, mainly because there's not a lot of news that you either haven't already been told about on our last conference call, that happened less than two months ago; or read about in the press release that we put out today. We will provide a brief update on our operations, but we're not going to repeat information you already have. And we'll leave time at the end in case you have questions. As the moderator said, the call is being recorded and we'll post it on our website at the end of the day, where will it will be archived for 12 months.

Before we start, I'll do the legal -- let me remind you that during this call we'll likely make what could be called forward-looking statements. And we'll be relying on the probations of the Private Securities Litigation Reform Act in providing this information, which is based on our current assumptions and current information available to us. What actually happens could be very different for a variety of reasons, and we're not obligated to update you on those changes as they occur. You really should read our form 10-Q SB that we'll file tomorrow, to better understand some of the risks and uncertainties that may affect us.

Assuming that you've all seen the press release that issued this morning and have it with you to refer to, you'll find the first quarter's very much in line with our expectation and comments we made during our last conference call in March. The operating companies continue to make progress, although, I would say they are making it at snails pace, but they continue to make progress. And they're on their operating plan for the year. There were no unusual events, either positive or negative, for the first four months.

I'll reiterate what I 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 fluctuate substantially. Much of the timing of software revenue recognition is determined by customer time frames, not ours, determined by the activities and acceptance process. Although some of it is dependent upon our software development activities and delays that we might be responsible for. But as a result of all these things, we're going to continue to make our decisions based on our customer requirements and the long-term best interests of the Company, rather than on the timing or the impact of these decisions on our quarterly financial results.

I'll go into more details on the progress and status in each of our companies a little later in the call. But at this time I'll ask Bonnie Herron, our Chief Financial Officer, to review briefly our results for first quarter 2005. Before she does that, let me mention that we're proud that in Georgia, Bonnie was selected 2005 Woman of the Year in Technology, for companies with less than $500 million in sales, last month. So, we offer her congratulations. Bonnie, you didn't expect that, but with that, go ahead and talk about the results.

Thank you very much, Leland. You're right, I didn't expect it, or the award. But I was really pleased to receive it.

Our consolidated results for first quarter 2005 include the same subsidiaries as last year, our three information technology or software subsidiaries; QS is in our CoreCard, and our industrial products subsidiary, which is ChemFree.

Total revenue for the first quarter, is on the press release, was $3.6 million, compared to $4.6 million last year. The decline, compared to last year, was mainly due to just one fact , and that is that our CoreCard subsidiary last year recognized $1.3 million of revenue from it's very first major customer installation in the first quarter of last year. And as expected, there was no similar large contract that was competed in the first quarter of 2005. If we factor out this one -- CoreCard's revenue, consolidated product revenue from our other subsidiaries; ChemFree, QS, VISaer; was actually up slightly compared to last year.

Our total revenue of $2 million in the first quarter of 2005 was on par with the immediately proceeding fourth quarter of 2004. In this period-to-period comparisons reinforces what Leland said earlier about the impact of software revenue recognition timing on our reported results. All of our software subsidiaries reported more service revenue in the first quarter of 2005, then in 2004. And that reflects a larger installed base of customers who pay us for professional services and annual maintenance and support.

Our overall expenses were lower in the first quarter of 2005 than the prior year as we continue to focus on managing expenses and cash, and as more of our indeed personnel expense was allocated to billable professional services work or deferred revenue.

The other item of note in the first quarter was $1 million of investment income that reflects a third cash distribution from the ISC Guernsey Asset sale in 2004, that we have discussed in prior calls. This third cash distribution brings the total we have received from that transaction to approximately $3.7 million, and we think there is likely to be another distribution of, perhaps, as much as $1 million later -- some time in 2005.

In addition to the revenue we recognized from the first quarter of 2005, at March 31, we have on our balance sheet net deferred revenue of approximately $5.7 million, reflecting 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. This amount grew by over $800,000 during the quarter.

Our financial position at the end of first quarter 2005 shows an increase in cash of almost $1 million during the 3 month period. This change includes the additional $1million distribution from the proceeds of the ISC Guernsey investment. Our established subsidiaries, QS and ChemFree, were profitable and cash positive during the quarter. And both CoreCard and VISaer are expected to use less cash in the remainder of 2005 than last year. As of today, we paid down our bank line completely. Looking forward, we are comfortable that our cash resources and availability under the bank line will be adequate for our current plans, and we'll address any monthly variations in cash flows.

As a non-accelerated SEC filer, we fall into the category of companies that have been granted a one-year extension by the SEC on the date for compliance for the requirements of section 404 of the Sarbanes-Oxley Act, relating to internal controls. We are already well underway on the project, and our plan is to continue with our implementation, although at a moderate pace, given the extended time frame. And this one-year extension will allow us to manage the cost of the project by doing more of the work internally, rather than using as many consultants as we might have done otherwise. At this point, I'd like to turn the call back over to Leland for some more remarks.

Let me spend a few minutes looking at the operating subs in more detail. First, ChemFree; it had a another solid quarter with good growth in it's international markets, and multi-year lease contracts with large corporate customers. We do expect ChemFree will continue to be a solid performer for us in the foreseeable future. The Company's bringing in some new product variations to market, and it's looking for ways to expand it's domestic sales programs, as well.

QS Technologies continues to be a profitable, cash positive business with installed base of customers that purchase annual maintenance and support contracts. This base provided a consistent level of service revenue and positive cash flow on an annual basis, although it's license revenue does fluctuate significantly from period-to-period. And also for reasons that reflect the timetables, budgets and priorities of state and local government customers that it sells to. QS has over 20 years of experience in the public health and vital records market, they are well-respected, and we expect they'll continue to make a solid contribution on an annual basis to our results.

VISaer continues to make products in it's web-based industry-specific software solution for the aircraft maintenance and engineering market worldwide. VISaer expects that it's next release, a little later this quarter, will be the go-live version for a number of it's current and prospective customers. They recently began working on a multi-year contract with China Southern Airline, that was signed earlier this year; as well as contracts with several smaller domestic and international customers. The Company has a good pipeline of professional services work and add-on license revenue with it's existing base of worldwide customers, as well.

What we know from experience at both our VISaer and CoreCard subs, is that selling software that is a critical component of the customer's operations, particularly when large international customers are involved, it often takes longer than planned to negotiate contracts and also to deliver, install and test the software; and this does make predicting and managing cash flows very difficult. I think, as I said before, I think VISaer hit the right product offering for markets that represents a substantial worldwide opportunity. VISaer's emphasis in 2005 continues to be executing on its contracts, earning great reference accounts, refining some of the internal development and testing processes, and efficiently managing its professional services work. VISaer's management team is committed and capable of doing all of these things well, so we're not looking for any real positive cash flow, could be slightly positive, could be slightly negative; but 2005 is a year to really get everything inline for the future.

Finally, our CoreCard sub is working on our next significant installation for our private label software license, similar in size and scope to our first large customer project. It involves Fleet Cards, and it's a very significant, difficult-type implementation. We also signed a smaller contract in the first quarter 2005 and have several other contracts in negotiation. We've certainly seen an increase in the number of leads we are evaluating, both from domestic and international sources. We are gradually stepping up our marketing efforts, we're doing it in a measured way, but we're going to continue to be selective about the number and type of new customers we take on in the near future. Because we want to make sure we devote adequate resources to these key early installations, and end up with very happy, referenceable customers.

We have expanded our offshore technical resources to speed up testing and development activities at a lower average cost, with employees based in Romania and India, which we believe is a key component to meeting the requirements for timely, price-competitive product offerings in both domestic and emerging international markets. We're also working with VISaer to use some of the CoreCard people and facilities in Romania and India to also help them with the average cost.

In closing, let me just reiterate that first quarter and near-term outlook, as far as I can tell, are pretty much business as usual, and the focus is really on execution. As I mentioned earlier, our form 10-Q SB will be filed tomorrow; and it'll also be available from the our website or the SEC website. Our shareholders annual meeting will be held on Thursday, May 26 at 4:00 P.M. in our corporate offices. We expect it to be a very short, formal meeting with only the agenda item being the election of directors. With that, I'll open it to see if there any lines of specific questions you may have that I'm allowed to answer. Moderator?

[OPERATOR INSTRUCTIONS] The first question comes from Ken Wasch (ph).

Hi, Leland, this is Ken. Sounds like great progress in the first quarter, I'm glad to hear it. I have two questions. First concerns the switching of auditors. I guess it was four or five months ago, you switched auditors. You issued a statement as to why that happened. Maybe you could give color around that.

The second questions concerns the QS subsidiary. That's a business that's been around for 25 years, and appears to be in a very, very competitive industry in medical records. Wouldn't it make sense that this might be a time to sell that business to some of its larger competitors? Although it's cash flow positive, as you've indicated, you wonder what the long-term growth is in a business like that, in such a competitive environment.

First question on the auditor, I'll let Bonnie say something about it. But let me just say one thing -- it's simply a matter of cost. We try to keep all of our expenses as low as we can, and the higher up you are on the food chain on auditors, the more they charge us for insurance, the way I look at it; so the higher the cost is. Even -- I would say that our former auditors -- actually, this may be putting too many words in their mouth, but I'll say it; they, at least informally, recommended that we might want to do something, because we didn't need that scale of auditing.

Good move then.

Yes, and I think, just industry-wide -- that audit firms don't have the resources to do all of the audit and 404 work that needs to be done. So of course, the largest customers are most important to them. And so, it just made sense for us -- and they have to increase their prices along the way, so we were looking at a very substantial increase in our audit cost. And we would be kind-of at the lower end of the client base, in terms of size. So it just made a lot more sense both economically and also to be a significant customer for the audit firm, and we've been extremely pleased with the quality of the audit staff that has been assigned to us, and they're responsiveness -- it's really been a good experience.

Thank you.

As to the other --dealing with QS, they're really not in medical records. They sell to state governments and do a little of what we call vital records, but thery're not in the medical record business at all. There are not really any dominant competitors. It's a small niche. Yes, we have -- we've had opportunities to sell them, but frankly, when we look at the cash flow versus what we could get for them, we've chosen not to do that.

The problem with a purchaser who has to buy it, if they pay us the kind-of price we'd like to have, they are going to get a lot of good will. They're going to have to write this off, and therefore, it hits their earnings. And it makes it difficult to make the numbers work. People would like to have it, but when they look at the fact that it's a software company, they have no assets, really. So, you have a lot of stuff you have to write off, and that goes straight against the earnings that the acquirer would be buying. It's a tough call there, and we don't want to sell it cheaply because the cash flow is good.

Thank you.

[OPERATOR INSTRUCTIONS] At this time there are no further questions. Mr. Strange, do you have closing remarks?

No, thank you to those of you who took the time to listen to the webcast. We're just going to keep doing what we've been doing. As I said early on, we're pretty satisfied. Sure, we could be happier if things were booming, but we're pretty satisfied that everything seems to be going in the right direction. And I think, maybe, the snails pace that I mentioned is probably the same snails pace that a lot of businesses are experiencing at this point in time. But we're just glad it's going in the right direction. Again, thanks, everyone.

Thank you, ladies and gentlemen. This concludes today's Intelligent Systems first quarter earnings release conference call.