CoreCard Corp (CCRD) 2005 Q3 法說會逐字稿

Good morning. My name is Lori and I will be your conference facilitator. At this time, I would like to welcome everyone to the Intelligent Systems third-quarter earnings release conference call. All line have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. I will now turn the call over to Leland Strange, President and Chief Executive Officer of Intelligent Systems.

Good morning. Welcome to the Intelligent Systems quarterly conference call. We are actually going to take a slightly different approach this morning and probably will do that in the future as well. We're not going to reiterate or rehash the things that are in the press release. I'm not using a canned script, although we have an outline. So we're going to try to tell you what little that we can tell you to add to that and then answer any of your questions.

The fact is, there's not a lot of new news that you either haven't already been told about on our last conference or that you don't find in the press release today. So I'll give you a short update on the operations and we'll leave time for the questions.

The call is being recorded and we'll post it on our Web site at www.intelsys.com by the end of the day, and it will be archived there for twelve months.

I do have to say, as we do at every one of these calls, that I may slip and make a real forward-looking statement. Who knows. So we're relying on the provisions of the Private Securities Litigation Reform Act in providing this information. We're saying what we think is true and what we think we will achieve but it could be different and the environment could change and we may not be in a position to update you on any changes.

So basically, I assume you've seen the press release and you have it with you. Basically the third quarter and year-to-date was very much in line with our expectations and also with the comments that we made during the last conference call in August. As was pointed out in the press release, the comparison between the two quarters or the third quarter of 2005, 2004 is actually skewed very much because of the single multiyear contract that VISaer recognized in the third quarter of last year. We didn't have and don't expect to have a contract of that size in this quarter or any other foreseeable quarter. If we strip away that 7.5 billion in revenue and the 4.9 million in gross profit that goes along with that, then our operating results for the third quarter of '05 were very similar to last year's with a little bit of growth in services revenue and an overall reduction in operating expenses.

So the differences in operating results between '05 and '04, either year-to-date or quarterly don't really represent any particular trends and are not really significant. I would reiterate what I've said in the past about the unpredictability of our quarterly results based on different things and the way we recognize revenue.

As we've also talked about in the past couple of quarters, two of our software companies, VISaer and CoreCard, are working hard to bring to market very complex, sophisticated products. Because the software in both of these is used by customers in mission-critical parts of their business, you can understand that there's a very extensive testing and revision to the software before a customer goes live in a production setting. It's a very time and resource-intensive process for both our companies. The companies are not large companies, but they have a significant number of development people working on the products. It's also a very time and resource-intensive process for the customers that are involved with us. And we are grateful for the support and the hard work of both our employees and also of our customers during this important phase.

We obviously want to get our software live at customer sites as quickly as possible, but it's really more important to be sure that we get it right and that we have happy customers on the long term than worrying about when we can recognize revenue on these particular contracts.

And I'll kind of stay with that a little bit by talking about VISaer and CoreCard. VISaer is focused on completing their software and the go-live for their existing contracts. We're not focusing on expanding the customer base at this point; we are very deep and heavy trying to get the latest version of our software out as bug-free as we can. We have a good base of established customers. We do have a fairly good income stream for professional services and support revenue. We also have a multiyear contract that was signed with China Southern Airline earlier this year. But other than that, we really are just simply working on getting the software up and in a position so that other major customers can be happy with what we're doing with the Company, and we are working very closely with those customers. There's always the possibility that it won't happen, but we think it will happen and we are working very hard at it.

CoreCard, very similar. We've installed two small customers in Q3. Still not looking to ramp up our sales and marketing until we can get things in a position to really scale in every way, where the effort now is to finish the software and deliver to another major customer. We are somewhat behind on that I'm going to say two to three months at this point. We are continuing to add to our offshore resources by adding people. As we've told you before, we have offices in Romania and in India. The Romanian offices are doing some work for VISaer but mainly are doing CoreCard work. The offices in India are doing work for CoreCard. These are offices of ours; they are not third-party outsourcing outfits.

So again, with CoreCard, we're simply working very hard on the software. We do have -- and this will be a little forward-looking -- we do have a couple of major customers lined up that we can get to work on as soon as we get this last big delivery in.

In terms of looking forward, we are in the process of doing our -- of budgeting -- I'm sorry. I skipped ChemFree and QS before I looked forward. I came back.

ChemFree, we had another profitable quarter. We still have significant legal expenses as we are trying to protect our patents and we have actually filed a lawsuit for an infringement action. We've spent a lot on the patents and we intend to try to protect them the best we can. We are adding new sales and distribution channels to try to address some large volume accounts in the U.S. That's where ChemFree has -- although we have gotten some of those, we feel like there's a lot of business that we've left on the table by not being able to address that real well and we think we've got an answer to that. So we hope we can see some increase in U.S. sales in that area. But again, it's a good, stable company.

QS Technologies, likewise, solidly profitable. It's a cash positive business. We have, just like VISaer, a good installed base of customers for which we get maintenance and support to continue to work with them. We continue to win our share of new business in public health and vital records software. It's not a company that's going to grow to be a large company no matter what resources we put on it because of the markets that they serve, but it is nicely profitable for us.

So what I was about to say awhile ago as far as looking forward to '06, we are in the process of doing our budgeting and planning for '06, but we are not close to being complete for that yet. I'd say that the near-term outlook is pretty much business as usual. The focus is on execution. The real challenges for the Company are the software projects at VISaer and CoreCard.

And with that, I'm just going to open it for questions if you have any.

(Operator Instructions). Ken Wash (ph).

I'm delighted to be on the call again. I love getting these updates. I'm particularly focused on CoreCard. You have the Fingerhut account as your major account for CoreCard. Can you talk a little about -- I know that it's very difficult in one of these calls to talk about the prospects for additional customers and additional reference accounts -- but obviously, the growth of the business is going to require some other significant reference accounts. What do you think you can tell us about --

Well, yes, a little bit. I would rather not talk about the other large one until we get it installed and everything is going well. We have none installed yet; Sam (ph), I'm a couple of months behind. But we have another one that would be similar to scope to Fingerhut. I've got to go one step further, it's a subsidiary that's owned by a major bank. So I think it will be an excellent reference account. It's very, very complex, much more complex than the Fingerhut software. So we're not at all just duplicating the Fingerhut installation. We've worked a full year on adding a lot of features. And I think I can go another step further to say it's in the Fleet business, so it's doing Fleet cards, and you get into things such as repricing daily of oil and keeping up with maintenance. So it's a very, very complex job and it will be a very good reference customer when we get up and running, because of both the pedigree of the company, it's well-respected and growing well, as well as knowing the complexity of the software. It will be the state-of-the-art in that business.

And a quick follow-up and that is, as you're increasing employment in India and Romania, is that reducing the number of employees that you have in Atlanta, or is it --?

No. What it does, it just allows us to keep it stable. We've added no U.S. employees in the past year, maybe two years. What we've done, we've made all of our additions to be in India and Romania. That's a way to get the average salaries in line to what we need to be a worldwide software competitor.

Eugene Reilly.

I'd just like to ask a little bit about ChemFree. For the last three years or so, they've been running 1.6, $1.7 million a quarter, and you mentioned they are profitable. And except for last quarter, there seem to have been a big uptick, and I'd like to know why was last quarter -- where did that big uptick come from last quarter? And then also going forward into the future, is there any sort of like event, whether from the government or within the industry or whatever, that might make it possible for ChemFree to break out of that 1.6 to $1.7 million range?

First, I'm not sure where you're coming from on a big uptick. I'm not aware that we had a big uptick. It's been pretty much summer, a little bit up, a little bit down but nothing big. And no, there's not any really large government order that will come out that I think will do it. What we're hoping for is some large U.S. companies that need volume, but that volume will be spread out. Nobody ever puts everything in in one quarter, any of the big companies. So it does get spread out over several years. If we had an order for example that's 1,000 machines, it would at least be spread out over four quarters. Nobody puts 1,000 machines in at once. So I don't see any potential for a really large uptick.

We do lease some of our machines, again, so we recognize that as we get the revenue or over the course of the lease. So sometimes we may have made a large sale, but that large sale gets spread out and doesn't show up in our books as a large sale.

But, no, I don't see any big uptick. I do see -- I am hopeful for -- let's put it that way -- a steady increase beginning next year based on the new channels that we are opening.

I was thinking like regulatory or anything, is there any incentive for new customers to start looking at ChemFree?

There clearly is, but in the current regulatory pro business environment, quite frankly, the regulations don't seem to be all that meaningful. There's always a way around them. I wish they would close those loopholes and take a harder look at environment, but in places that have tried to do that, they sort of pass the law at one level and then they provide loopholes at the next level. So in the past, we've had high hopes for that, particularly in some areas in California, but we find that people usually find ways around them.

Right. And the reason that I mentioned the uptick I guess was because I know the product revenue last quarter was 2.8 million, but I guess some of that was the Infotech products.

Yes, that was the other thing.

I forgot to break that out.

Yes, there was not an uptick on that.

Norm Gruen (ph).

Let me ask you some questions (indiscernible) and maybe some other ones. How much do you have to spend on Sarbanes-Oxley?

Well we're not spending very much on Sarbanes-Oxley at this point. It's gotten postponed for another year, so it's not a factor in our expenses at this point.

Good. Okay. You talked about waiting to ramp up CoreCard until you can implement many implementations profitably. When do you anticipate that will be?

Well, I don't think I want to put a timeframe on it. See, I'm a couple of months behind on the current big installation. I expect us to do another very large one after that, but it would only be after we completed that that we would be in the position to figure out how to scale.

The other thing that we're waiting on there is that we need one installation that uses what we call association card, that's a Visa or MasterCard as opposed to a private-label type card. So it's hard to put a timeframe on that right now. Software, if you do it right and do it for the long term, it's very difficult to know for sure on software until it's done.

Okay. The implementation with a Visa or MasterCard, that's the one after this Fleet subsidiary?

Well, no, I don't have that one -- well, let me say, I don't have that one lined up for sure. I have another large contract lined up after this particular. We have a couple more in the wings that we'll have to decide how much we can handle. We are bound at this point by our resources. Unfortunately, they are not resources that scale. There's a long learning curve in terms of what we're doing, but we are producing software that can be reproduced and we will be able to scale once we cover a little bit more ground. For example, when the Fleet product is up, ready, and then we get the next one that I don't want to too much about, but it's a similar size and scope, get it up, the only hold I'll have is the Visa/MasterCard and we may be able to work on some of that simultaneously. Once those are up, once that software is reasonably complete, software of course is never complete, and never bug free, but once it's reasonably up, then we'll be in a position to scale at that point. So I'm really looking for at least a year to be able to scale.

And when you say be able to scale (multiple speakers)

It's simply means that I have software that I can pretty much install as it is. Everybody requires a little customization, but generally it requires very little customization to put in a whole variety of places. At that point, we can ramp up sales and marketing because we'll be able to have successful installation. At this point, we're having to do -- continue a lot more development on the software for the current contract. But it all goes into a base, core product that everybody will use parts of. So we are not in the custom software business, although it appears that way at this point. But that's not what we're doing.

Okay. So you envision arriving at that point where you can scale in approximately one year or so?

Approximately.

Okay. Can CoreCard do nearly everything PACES did functionally?

It can do nearly everything -- yes, it can do nearly everything now.

Okay. And then another question I had. Do you have any goals at this point for CoreCard or VISaer sales and operating income in the next calendar year?

I certainly, yes, project those. I mean we'll have some internal budget things, but I'm not -- we don't publicize those.

Are you protecting them to operate around breakeven?

Again, I just don't project those.

Okay, that's okay. Just a last question I like asking you throughout the years. If you had the silver bullet with which you could eliminate one competitor of each subsidiary, which four companies would those four be now?

I would never name a competitor on a call like this. I like (multiple speakers)

Well thanks for the prior answers. I look forward to your next update.

(Operator Instructions). Sam Robotsky (ph).

As usual, you're pretty straight up. Your deferred revenues this quarter is about a quarter -- 250,000 or so. What is the expectation of the 6 million plus revenue? When is that going to be earned, and going forward?

(multiple speakers). When will we be -- it's up some; when do we expect to be able to record it. I'm going to let Bonnie talk to that.

Okay, great.

That will be recognized over the next twelve months and about half of that is related to VISaer contracts that they are working on. And the rest represents generally CoreCard, ChemFree and QS deferred revenue. As Leland mentioned, when ChemFree booked late leases, some of that goes into deferred revenue and gets recognized as they -- the next couple of months. QS, same with maintenance, and CoreCard, same with maintenance. And so it's really spread among the four subsidiaries both being at VISaer, but it's expected to be within the next twelves.

Yes, I think that's the key. Obviously, when a company ends up billing their maintenance revenue let's say on a particular bump, they bill it for the year, but we can only recognize -- and they may get paid -- but we can only recognize it on a month-to-month basis over the next twelve months.

And with your current cash and your loss about $1 million for this quarter, what is your expectation of breakeven or --?

On cash, we frankly don't see any problems with cash. We've got a good bank line if we need it. We owe the bank nothing. Our lines, close, around $2 million and we owe them nothing. We don't anticipate going in; if we do, it will be a short-term go-in and come out. So we're doing fine with cash.

Okay. And at this point in time, I assume you have nothing like the Guernsey transaction going forward?

Do not, do not. No, I have nothing like the Guernsey transaction, no. We do have other ownership, interest, in some cases they are in LLC's and there could be some distribution from them but nothing of the size of the Guernsey transaction.

And we don't expect any IPOs or any kind of filings like that?

Not in the foreseeable future.

And so you feel, as far as the next year is concerned, you will not have to raise any additional cash. Your regular operations will provide whatever you need?

That's correct.

Okay, super. Good luck. And there may always be a rabbit in the hat someplace down the road.

We're hoping.

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

Well no, other than thanks and particularly thanks for your questions. I find that the best way to try to give you things that you really want to know rather than things that we try to feed to you. So this will be more or less the trend for the future. We'll keep the presentation short. We'll be sure and tell you things that if we know them that are different from what they were the previous quarter, but we'll try not to rehash it and be respectful of your time also.

So thanks again for being on the call and we'll talk to you in the next one.

Thank you. This concludes today's Intelligent Systems third-quarter earnings release conference call. You may now disconnect.