CoreCard Corp (CCRD) 2005 Q2 法說會逐字稿

Good morning. My name is Crystal and I will be your conference facilitator today. At this time I would like to welcome everyone to the Intelligent Systems Second Quarter Earnings Release Conference Call. [OPERATOR INSTRUCTIONS] I will now turn the conference over to Mr. Leland Strange, President and CEO. Please go ahead, sir.

Thank you. Good morning and welcome to the Intelligent Systems Quarterly Conference Call. This call will likely be about the same length as our last call, which was somewhat shorter than our earlier calls, mainly because there's not a lot of new news that you either haven't already been told about on our last conference in May or read about in the press release today. We will provide a brief update on our operations but will try not to repeat information you already have, and we'll leave time at the end for any questions you might have. The conference call is being recorded and we intend to post it on our website by the end of the day today where it will be archived for 12 months.

Before we start let me make the lawyers happy by saying we'll be making what could be called forward-looking statements. We're relying on the provisions of the Private Securities Litigation Reform Act in providing this information which is based on current assumptions and information available to us. However, what we actually achieve could be very different from our current plans for a variety of reasons and we're not obligated to update you on changes that may occur, when they occur. You should read our form 10-QSB that we expect to file next Monday to better understand some of the risks and uncertainties that may affect us.

So with that out of the way, I'm going to assume you've all seen the press release that was issued this morning and have it with you to refer to. Basically, the second quarter and year-to-date was very much in line with our expectation and the comments made during the last conference call in May. Our operating companies continue to make progress, even though in some cases very slow, but they're making progress in their operating plan for the year and there were no unusual events, either positive or negative, that impacted our operating companies during the first six months of this year.

I would, however, reiterate what I've said in the past about the unpredictability of our quarterly results on a quarter-to-quarter basis and the fact our revenue and profits are likely to continue to fluctuate substantially. Much of the timing of software revenue recognition is determined by customer time frames, activities and acceptance processes, although some of it of course is dependent on our own software development activities and the delays that we could be responsible for.

As we discussed in the past, two of our Software Companies, VISaer and CoreCard are bringing to market very complex, sophisticated products and are making progress on their first live installations. Because the software is used by customers in mission-critical parts of their business, you can understand that there's very extensive testing and revision of the software before a customer goes live in a production city. It's a very time and resource intensive process for both our Companies and our customers and we're grateful for the support and hard work of our employees and our customers during this important phase.

While we're focused on getting our software live at customer sites, we are more concerned about getting it right and having happy customers long term, than of what we can recognize the revenue [owned] of these contracts. And as you can expect, we can not recognize revenue until at least they're live and have accepted the software. We simply don't push that as a general rule. We simply push to try to get it done right.

I will go into more details actually on the progress and status of each of the Companies a little later in the call. But at this time I'm going to ask Bonnie Herron, our CFO, to review briefly the results of the second quarter year-to-date periods for 2005.

Thanks Leland. Our consolidated results for 2005 include the results of our three information technology subsidiaries, QS Technologies, VISaer and CoreCard Software, and one of our industrial product subsidiaries, ChemFree.

Now taking a quick look at the second quarter figures, our total revenue for the second quarter was 4.7 million, a 39% increase compared to 3.3 million last year. And in the six-month period of this year, our revenue increased to 8.2 million, a change of 3% over last year's revenue for the first six months of the year. The biggest increase in the second quarter was a 58% jump in our product revenue, which was due to our VISaer and QS Technologies subsidiaries booking software license revenue at new customers as well as selling more add on licenses to existing customers. This increase in software revenue offset a slight period to period decline in the number of machines sold through ChemFree's distribution network.

Our total service revenue was up by 18% and 14% in the three and six-months period this year compared to last year, due to a larger installed base of VISaer and QS customers that pay us for professional services and annual maintenance and support. Our overall expenses were lower in both the second quarter and year-to-date periods for 2005 compared to last year, as we continue to focus on managing expenses and cash and as more of our R&D personnel expense is allocated to billable professional services work.

The other item of note in the second quarter was 914,000 in investment income, which includes 1.1 million related to a fourth and final distribution from the ISC Guernsey asset sale last year that we discussed in prior calls. An offset against this was a write down aggregating 161,000 in the second quarter to reflect changes in the carrying value of our holdings in two privately held technology companies. In the year-to-date investment income we include a total of 2.1 million from the ISC Guernsey distributions in the first and second quarter of this year.

In addition to the revenue we recognized in the first half of the year, at June 30th we have on our balance sheet net deferred revenue of approximately 5.8 million, reflecting payments from various customers we expect to recognize as revenue in the next 12 months when we have completed delivery of the associated products and services. This amount has grown by almost 900,000 since the beginning of the year.

Our financial position at the end of the second quarter shows an increase in cash of 761,000 during the six-month period since December 31. This change includes the additional distribution from the proceeds of the ISC Guernsey investment. Our established subsidiaries, QS and ChemFree were profitable and cash positive during the quarter and year-to-date and both VISaer and CoreCard are expected to require less cash in the remainder of 2005 than in last year. As of today, we will have paid down our bank line completely.

Looking forward, we are comfortable that our cash resources are reasonable and the availability on our bank line will be adequate for our current plans and will address any monthly variations in cash flows from operations. We expect to renew our line of credit in the near future although we're just beginning the renewal process at this time.

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

Okay. Bonnie, thanks. Let me spend a few minutes looking at the operating subsidiaries in just a little bit more detail. ChemFree had another profitable quarter with continued strength and recurring revenue from the sale of fluid and filters to its installed base, and also, as a result of the multi-year lease contracts we have with large corporate customers. Sales of machines in both the domestic and international markets were down this period compared to last year due to lower than expected sales through the distributor channel. ChemFree is bringing some new product variations to market and is adding additional distributors and other sales channels to better reach what it believes is still a significant untapped market for [bio-remeding parts] washers. We continue to expect ChemFree to be a solid, long-term profitable performer for us.

QS Technologies continues to be a profitable, cash positive business with an installed base of customers that purchase annual maintenance and support contracts. This base provides a consistent level of service revenue and positive cash flow on an annual basis although a slice in revenue fluctuates significantly from period to period and often for reasons that reflected time tables, budgets, and priorities of its state and local government customers. QS has over 20 years of experience in the public health and vital records market, they're well respected, and we expect they will continue to make a solid contribution on an annual basis to our results.

As I indicated in my introduction, our last two subsidiaries, VISaer and CoreCard are similar in many ways. Both are bringing to market very complex sophisticated software running on PCs that performs critical business functions for their corporate customers. That means that corporate customers really cannot take a chance on the software until it's fully tested. On one hand, the complexity and investment required to develop such products means there will be a few direct competitors. And once established, we should be in a strong position to capitalize on the worldwide opportunity. But on the other hand, the sophistication and complexity means it takes longer to get to a production ready version, not just in the development phase, but in the critically important testing and quality assurance that's required before customers will typically go live on the software.

Employees and management at both companies are working very diligently with their customers to complete, install, test, and support the newest software releases. We've added additional resources at our offshore subsidiaries to help complement those efforts and expect to continue to increase the size of our offshore facilities. I would emphasize that it's more important to us to make these customers happy and to do the job they expect than for us to make money on these customers this year. We are going to invest whatever is required to do it right for the customer. We believe that will pay returns in the future.

You will remember that VISaer is bringing to market its web based industry specific software solution for the aircraft maintenance and engineering market worldwide. Several customers are now live on the software, and we're hopeful that at least one or more additional key customers will go live in the second half of the year. They also recently began working on a multi-year contract with China Southern Airlines, that was signed earlier this year, as well as new contracts with several smaller domestic and international customers. The Company also increased the revenue it earned this year, and expanded its pipeline of future professional services work and anticipates selling more add-on licenses to its existing base of worldwide customers, as well.

Despite some frustrating delays over the past year, VISaer has enjoyed good support from its customers during this period and, as I've said before, I believe VISaer has the right product offering for a market that represents a substantial worldwide opportunity. We're going to continue investing what it takes to realize that opportunity. VISaer's emphasis in 2005 continues to be on executing on its contracts, earning rate reference accounts by doing a good job, refining some of the internal development testing processes, and efficiently managing the professional services work. VISaer's management team is very committed and they're committed and capable of doing these things well, although you will always have blips in balances when you try to do them with this kind of software.

Finally, our CoreCard subsidiary, it's working on several new contracts, one of which will be our next significant installation for a private label software license similar in size and scope to our first large customer project, which was Fingerhut. We expect to deliver the software in the next few months, although the customer's timetable for going live on the software will be subject to their own internal processes and business factors. That makes it difficult to predict when we'll recognize revenue on the software. Earlier in the year I think we thought it would happen this year but it easily could move into next year which means $1 million could move back and forth just based on the customer's own internal processes.

In addition we've signed several smaller contracts in the first six months of the year. We continue to add some professional services work for our existing customers. We've seen an increase in the number of leads we're evaluating both from domestic and international sources. We're going 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 resources to these key early installations. We've expanded our offshore technical resources to speed up testing and development activities at a lower average cost with employees based in Romania and India and we believe this is a key component to meet the requirements for timely, price competitive product offerings in both domestic and emerging international markets. The employees in these two countries are our employees as opposed to using established offshore type companies. Like VISaer, CoreCard's focus in 2005 is to execute on its contract, earn more reference accounts, and selectively build a pipeline of new business while refining its internal processes and cost structure for the long term.

I might also add that both VISaer and CoreCard are probably six months behind where I thought they would be, maybe a year ago, simply because of the complexity of the software. So that means our runout will be a little slower than what I had hoped and will not be going into the first of next year with all guns blazing, but will be going in still at measured progress.

In closing, let me just reiterate that the second quarter and near term outlook, as far as I can tell, are pretty much business as usual and the focus is on execution. As I mentioned earlier our form 10-QSB will be filed on next Monday and available from our website or from the SEC website. Now let's go back to the operator and we'll open the lines for any specific questions you may have that we're able to answer.

[OPERATOR INSTRUCTIONS] [Ken Wash]

Hi, Leland. This is Ken Wash calling. Very positive, very upbeat presentation sounds like things are all headed in the right direction. My question is about CoreCard because I've been paying attention to your comments about that. Apparently CoreCard is the business that you personally are spending most of your time. And you've now moved some of your programming offshore. How many employees now are there in CoreCard? What does that compare to a year ago? And the third question is apparently that is the business that's requiring the largest cash investment at this point. And is -- do you have a sense as to -- or can you describe the monthly investment that we're making in CoreCard at this point relatively to a year ago?

Okay. Some of that question I can answer and some I shouldn't given the guidelines we have now. Let me try to remember the questions. You asked about size of CoreCard relative to the year ago. We're probably 20, 25% larger. I haven't done the exact number. We have not increased our employee count in the U.S. so all of the increase is Romania and India. And we continue to do that every few months, we're going to keep adding there.

In terms of relative investment, it's similar to what we were making a year ago. You remember the key to it, as I said earlier, has to do with when people accept the software. When they accept the software, that means that we get large cash, if it's large account we get a lot of cash. If one that we plan to happen this year actually drags into next year, then we'll be making more investment in CoreCard this year but it will be made up early next year. So it's a hard question to answer.

I will tell you that we're not spending a lot more. We're probably spending a little less in each of these Companies than we did last year. Now, part of the reason is I am unwilling to spend a lot of money on marketing and sales for CoreCard until we have the product pretty much down pat. Now of course software is never really down pat, but until I'm comfortable that we can implement many implementations profitably, I do not want to build the pipeline too large.

Thank you.

[Al Shan].

Good morning, Leland. Just wanted to ask you, any comments on new things you're looking at or new investments that you're making and kind of what that landscape looks like?

We're really not -- we really have nothing that we're making a new investment in, right now, that I know of. We continue to work with our other Companies. Now, we're always looking for things that will help our current businesses kind of coexist or use the expertise that we have in house. So we're forever going to be looking at things, but we're very selective. And I would say right now, no, there's nothing that comes to mind that would meet the criteria that we would set for building the Company.

Okay. Good. Thank you.

[OPERATOR INSTRUCTIONS] [Jeff Rothenberg].

Mr. Strange, the Company owns a percentage of Horizon Software, and I had read recently that Horizon had received a large government contract for all the military services. And I was wondering if you could comment on the Company's interest in Horizon Software.

Yes. We own less than 20%. It's a software company that is located very near us geographically. They did win a department of defense contract. I believe that was with IBM. They were providing the software part and IBM was providing the rest of it. It's a very good company. It's a company that we think has a lot of potential. It's a company that at one time we had looked at owning more of. It's a possibility. It's probably not likely, given, you know, how well they're doing. They have no need for cash. They're doing very well. They have a good management, good people. So it's just a good company that we are involved in.

Do we know how profitable they are? Is it a private company?

It is a private company owned primarily by the founders, so those numbers are not released. But they are nicely profitable.

Thank you.

Ken Wash.

Leland, I was just going to ask about some of the minor investments. Any others that you may be selling and converting to cash? I know you can't identify which ones, but I know other than the four major investments, the minor ones, anything else that looks on the horizon that you might be turning into -- selling and turning into cash in the next few months?

No. There's absolutely nothing significant. I don't know whether there may be small ones or not. We're always trying to make sure that if the money we put into the Company is not something that long term works with our Operating Companies or makes sense, that we may as well get out of them. But of course some of these were made in the heyday of the Internet boom too, and they're just -- they're not under our control. But I would say, no, you can't expect any big debt from any of these.

Now, I will say -- I always say that we're an Operating Company. But if anybody wants to pay our shareholders a lot more for all of it or any part of it, we will make a sale. So, you know, I always have to say when I say there's nothing on the horizon, if somebody walks in the door tomorrow and wants to pay a lot of money for QS, or ChemFree, or CoreCard or anybody, I don't want that to be counter to what I said today. But there's nothing on the horizon, right now, that we're dealing with.

Thank you.

At this time, there are no further questions.

Okay. Well, we thank you for taking the time to both listen to us and question us. As I say, the news is pretty just flat. We continue to do what we're doing. We're happy with where we are. I guess I say we're happy. We always like to have more but we're not unhappy at all with where we are. We're going to just keep the plow going in the same direction and hope that it results in good returns for all of us. So thank you again.

This concludes today's Intelligent Systems Second Quarter Earnings Release Conference Call. You may now disconnect.