CoreCard Corp (CCRD) 2005 Q4 法說會逐字稿

Good morning, my name is Lynn and I will be your conference operator today. At this time I would like to welcome everyone to the Intelligent Systems year-end earnings release 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 session. (OPERATOR INSTRUCTIONS). I would now like to turn the conference over to Mr. Strange, President and CEO of Intelligent Systems.

Good morning and welcome to the Intelligent Systems quarterly conference call. Any of you that have joined us in the past conference calls, we appreciate your continued interest in the Company. On our last call in November we took a slightly different approach and plan to follow the same format today. There's really not a lot of new developments that you either haven't already been told in previous calls or that you've not read about in the press releases. So I'm just going to make a couple of comments on the 2005 results and then provide you a short update on our operations.

We will, as we usually do, leave some time to answer any questions that you might have about the press release or our operations. The call is being recorded and it will be posted on our website by the end of the day today where it will be archived for 12 months.

Again, before we start let me remind you that during this call 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 our current assumptions and information that's available to us. However, what we actually achieve could be very different from our current plans for a whole variety of reasons and we're not obligated to update on changes as they occur. You should read our Form 10-KSB I think it's called now that we'll file by the end of March to better understand some of the risks and uncertainties that affect us.

I assume you've all seen the press release that we issued this morning and have it with you to refer to. Basically the fourth quarter and year-to-date results were in line with our expectations and comments that we made during the last call. As we pointed out in the press release, it's very difficult to compare the financial results of '05 and '04 and they're skewed because of the single multiyear contract that VISaer recognized in the third quarter of last year. I guess I use the word skewed a lot because that happens. With the current revenue recognition policy sometimes you get multiyear contracts that get recognized in one quarter and that clearly skews how you're actually doing.

We didn't have a contract of that size in '05 and we don't expect to have one in the foreseeable future that large. If you strip away the $7.5 million in revenue and the $4.9 million in gross profit contribution from that single contract, our product revenue actually grew 8% and our service revenue grew 14% in '05 compared to '04. There were no unusual transactions or revenue items recorded in the fourth quarter. Both our product and service revenue increased in the fourth quarter of '05 compared to '04 mainly due to VISaer's contribution. And our consolidated loss from operations was comparable to the fourth quarter last year.

I would reiterate what I've said in the past about the unpredictability of our results on a quarter-to-quarter basis and the fact that our revenue and our profits are likely to fluctuate substantially. Also, as we've discussed in the past, two of our software companies, VISaer and CoreCard, are bringing to market very complex, sophisticated products. Because the software is used by customers in mission critical parts of their business, there are very extensive testing and revisions of the software before a customer goes live in a production setting.

It's a very time and resource intensive process for both our companies, both VISaer and CoreCard, as well as the customers and we're grateful for the support and hard work of our employees and customers during this important phase. A lot of time sometimes can be spent by the time you deliver a product and the time a customer finally goes live and therefore a lot of time can be -- I guess a great degree of time can be spent between the time we've actually finished work and the time we account for the revenue.

And while we're focused on getting our software live on customer sites, we're most concerned about getting it right and having happy customers long-term than on what we can recognize the revenue on those contracts. So we simply do not push in order to get revenue recognition. We devote our efforts to push to making the customer happy and getting the product right. The revenue falls whenever it falls.

Let me touch briefly on each of our subsidiary operations. ChemFree, it was another profitable year although volume of parts washers sold was slightly down compared to '04 but fluid and filters were up substantially. We added new sales in mid 2005 to address large volume customers. We've also had some recent wins in this quarter, Home Depot is taking a large volume over the year so order and production volume is up sharply -- I use that word 'sharply' -- in Q1 '06, but that's still too early to know whether that will represent a trend for the year but it is really good at this point.

We have had significant legal expenses at ChemFree. Unfortunately we can't just devote our time to operations, we do have to devote our time to also protecting the patent and fighting patent battles. We spent over $0.5 million in '05 to protect the patents and infringement. We'd be significantly more profitable if not for the legal fees.

I would say one patent infringement action that we're taking is likely to cost us as much as $1 million in total. Unfortunately it will probably cost the other side also $1 million and, I'll be honest, I don't understand why it's worth that kind of money to the other side, but nevertheless we feel it's important on principle to defend our patents, so we intend to spend whatever it costs and then we'll make back the earnings later.

That's just in one infringement action, we're also involved in some others. I guess I should take some comfort in the fact that other people feel that the patent or the business that underlies the patent is that valuable to spend that kind of money defending it. We're actually not going after people who have any kind of significant business already in the bio-remediating parts washer business, so they simply want to get in the business. So we'll be defending these both in the U.S. and in Europe quite aggressively and spending whatever it takes to do so.

QS Technologies, it's a solid, profitable, cash positive business, had growth in both new license revenue and services to the installed base in '05 compared to '04, the installed base of customers for maintenance and support revenue continues to grow each year and they continue to win their share of new business in public health and in bio-record software.

VISaer, they delivered the go live version of Web-based product under their existing contracts in Q4 '05, so we're ready to go with that version. And when I say ready to go it doesn't mean you're finished because you're never finished with software. We have a good base of established customers in both domestic and international markets both for professional services and support revenue as well as for continued add-ons. We are entering 2006 with a reasonable pipeline of business from the existing base of customers.

Our multiyear contract with China Southern Airlines that was signed earlier in '05, all that revenue is being deferred until the software is delivered in a later period. It's likely not to be delivered even in '06, so even though we're spending a lot of money, that will be deferred until later.

As you know, the airline industry continues to be in a state of change and that's going to impact new product acquisitions and competitive dynamics. I think we can also expect some consolidations and constant realignment and looking at how they do business. That's not really a positive for us, but we think we're in a neutral or slightly positive position with VISaer and so we expect it to continue to grow in real terms in '06.

CoreCard, CoreCard software. We did not recognize any significant new license revenue in '05, but we expect to install and recognize revenue on two good-sized projects in '06 as well as several smaller ones. So '06 should be a good year for us as far as actual both getting product in as well as revenue recognition. We're continuing to add significant new product functionality and our customers are working closely with us on the business requirements and functionality for each application module. We continue to add product to our current customers' products and we are running over 1.5 million accounts with one customer, so the product has proven to be very heavy-duty as we expected it to be.

We're being very selective about the number and type of new customers we take on. I think a true indicator of that is that we do not have any sales people at CoreCard still, we do not have any marketing people other than one new college graduate that simply responds to Web inquiries and other inquiries and keeps the marketing stuff together. So we're getting a good pipeline of business, we're getting a lot of interest just based on the quality of the software and what it can do. We simply can't take on a lot of business because of how long it takes to both get this product in and to measure customer requirements and make sure we sync up with that. And the fact that we're continuing to develop a product in a very significant way for a couple of other people.

We're confident that there are significant markets for CoreCard software given the fact that we've seen all this happen with almost no marketing. All of our restrictions will be lifted this year from our sale to First Data so we will start marketing the latter part of this year and expect 2007 to be very good for us in that. We continue to add offshore resources.

We have twice as many employees offshore as we do in the U.S. And this is not offshoring, these are Intelligent Systems or CoreCard offices both in India and Romania and they are our employees as opposed to some kind of contract employee with third-party offshoring. Our focus is simply on delivering under the existing contracts this year while selectively adding a very few new customers and providing a solid base to be able to scale the business in future years.

So in closing, let me say that 2006 focus is on execution and ensuring the fundamentals are in place to profitably grow each of the businesses that I've been talking about. We expect that the operating losses and cash requirements will be lower in 2006 than in 2005, although there will still be considerable variation from quarter to quarter and from subsidiary to subsidiary.

Before we open up to questions let me mention that we expect to schedule these conference calls periodically through '06, but we will not necessarily do them each quarter unless there are new developments or news to report. The kind of business that we're running, primarily software businesses, do not move very quickly at this point so there is not a lot of new things I can say on each call, so we'll be more selective as to when we have calls. So now, operator, let's open it up for any questions that anyone may have based on these comments.

(OPERATOR INSTRUCTIONS). Ken Wash.

Hi. I'm always delighted to be the first question and it sounds like you've had a good quarter and delighted to see the progress. My question is on what you didn't discuss which was any of the other minor investments. Any of them likely to be sold or monetized sometime this year?

You know, there's nothing significant that's likely to happen this year on any of the other investments. We have a couple that I would characterize as very nice investments; frankly most of them are very small and will not be very significant. There are a couple that we will monetize at some future point, but I don't think it will happen this year. I always have to say I don't think because these are ones that we do not have controlling interest in. And if someone decides to sell the Company or do something different, it could happen, but I don't see anything happening this year on those.

But further, if I can follow on, you've made no other significant new investments in probably a couple years as I seem to remember. Is that right?

We have not made them in new companies, we've been making significant investments in CoreCard particularly.

Sure, I know CoreCard.

But we have not. We are open. I will say frankly there will be small ones and we're open to participate with other BCs. And just something I might mention to the group that's here. Intelligent Systems has sponsored a Gwinnett Innovation Challenge which is a business bank competition in our local area where we are giving prizes of I think up to $80,000.

So we're reviewing a lot of business plans even as a part of that. I think we've got 40 or 50 business plans. We're active in the venture community. We're active in the investment community. While we're primarily an operating company, we do some of this as far as community involvement and obviously we always want to have our eyes open for a good opportunity. So you're accurate in that we have not made anything significant lately, doesn't mean we won't.

Great, thank you, Leland.

(OPERATOR INSTRUCTIONS). Sam Robotsky.

Good morning, Leland and Bonnie. I noticed the deferred revenue was 6 million in the previous quarter, it's down to 4 million 7 and you indicate that a good deal or portion will not be into '06. Can you quantify what relates to -- that would be '06 and what would be subsequent?

Most of that will be in '06. Most of that's '06.

Okay. Now based on the balance sheet with the 2 million stockholders’ equity, although you indicate you won't lose as much as you lost in the current year, will you need to raise additional funds or would you do borrowings just to get you over? What are your plans there?

Yes, we would just do short-term borrowings. We constantly kind of do that in and out based on how things are happening. Bonnie, what's our outstanding balance in terms of borrowing approximately? Okay, our outstanding borrowing is down under 1 million. We have a 2 million line of credit. We use that erratically, but we think the year on a cash basis will be pretty decent, pretty good.

So we lost 1.626 million, so you're saying you don't expect to lose as much as that for '06?

No, no. We certainly don't.

Is it possible to make a profit or is that --?

You know, yes, it's possible. I don't want to go do predictions at this point.

No, I'm just looking for a feel, I'm not looking for any --

The feel is that we're pretty darn comfortable with where we are. We've got some pretty significant contracts at CoreCard that will be both delivered and paid for this year from a cash standpoint. ChemFree is doing very well despite the very high legal costs and frankly legal cost is one of the variables. If you say we're going to spend another $700,000 in legal costs that's certainly not an operating issue, but we'll do it. So there's some variable there, but we're pretty comfortable with where we are.

And as far as the CoreCard or VISaer, I guess there's nothing in the immediate future where any kind of acquisition or public offerings are available at this point. So we have to look down at least another year or so before something like that happens I assume.

I will say that from a CoreCard standpoint I absolutely don't see anything happening. We've got in my opinion too good of an opportunity and we're too early on it to get what we ought to get out of that. I think it's a very good opportunity there and we're making good progress. From VISaer's standpoint you're not nearly as early in the game, you have a much tougher market and we could do some acquisition add to them and it could be that we'll find someone that would like to purchase them. Well, actually that's not the best way to say it.

There's always people who would like to purchase CoreCard, there's always people who would like to purchase VISaer, there are always people that would like to purchase ChemFree and there are always people that would like to purchase QS. And I'm not being facetious, we get a fairly steady stream of inquiries on each of those. If any of them come along at the right price we'll take that opportunity or if circumstances change and we decide we want to put more money one place rather than the other we would take that opportunity.

So I guess what I'm trying to say to you is that I don't think it would happen at CoreCard. There's probably not a chance of it happening at ChemFree or QS. There might be a chance of it happening at VISaer. I'm just giving you my gut feeling.

That's good, Leland. This is the kind of call we just want to get a feel and there's no -- nothing is binding and everything is subject to change always.

And you know, because of the way industries are and the way we see the future at some point, again just speaking off the cuff here and the financial and legal people probably want to kick me under the table, but my feeling is sometimes you would take one of these subs and say I wouldn't take less than 15 million for it. And if circumstances change I might say I'd take 7. And also, it's not just that sub, it has to do with where we see we could put that money to really build even greater value somewhere else.

And one further thing is with the stock trading at this low valuation under normal circumstances you wouldn't want to raise additional funds. But to the extent that you may have opportunities and you think that if you would consider a rights offering to present shareholders, if you had opportunities and had --

Yes, there's no way I'd raise money [definitely given] this price. Now doing it with a rights offering with current shareholders is a different thing because that would say it's only current shareholders that gain or lose. But I would not go to the market and raise the money to (multiple speakers)

No, I understand that. I'm 100% behind that. I'm just saying, if an opportunity came up and you want to do it I would think I would entertain the idea of buying more shares in a rights offering.

Right.

Okay. Well, hopefully something kicks in and keep up doing what you're doing.

(OPERATOR INSTRUCTIONS). There are no further questions. Mr. Strange, are there any closing remarks?

Again, thank you for taking the time to be on the call. I hope I've answered the questions. As you could tell, I probably enjoy more the Q&A than I do trying to give you the written response to where we are. We're always happy to do that any way we can as long as we stay within the framework of the law as to what we are able to do. But we appreciate your staying on and staying with us and we hope to bring you -- continue to bring better value in the future. So thanks a lot.

This concludes today's Intelligent Systems year-end earnings release conference call. You may now disconnect.