CoreCard Corp (CCRD) 2006 Q3 法說會逐字稿

Good morning. My name is Heather and I will be your conference operator today. At this time, I would like to welcome everyone to the Intelligent Systems 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)

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

Thanks. Good morning and welcome to the Intelligent Systems' quarterly conference call. I'm sure many of you have joined us on past conference calls and we appreciate your continued interest in the Company.

Our last call was in March, and at that time, I indicated that we would hold these calls on an irregular basis when it seemed appropriate, rather than every quarter, since things really had not moved -- there were not a lot of changes quarter-to-quarter, and we thought we would really only use these calls at the time that we needed to explain some changes.

We're going to follow the same format that we used in our most recent calls, with a brief overview of the third quarter and year-to-date results that were contained in the press release that was issued this morning. And then we will provide a short update on the operations of each of our subsidiaries. We will leave time at the end for any questions that you might have about the press release or our operations.

The call today is being recorded and will be posted on our website at intelsys.com by the end of the day. and it will be archived there for 12 months. We will also be filing our Form 10Q-SB with the SEC a little later today.

I guess before we start, I need to remind you that during this call, we will likely make what could be called forward-looking statements, and 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 whole variety of reasons, and we are not obligated to update on any changes that may occur. I encourage you to read our Form [10Q-SQ] to better understand some of the risks and uncertainties that may affect us.

I'm going to assume that you've all seen the press release that we issued this morning and that you have it with you to refer to. It was a potentially busy quarter, as we completed the sale of our QS Technologies business to Netsmart Technologies and the sale of our $0.17 interest in Horizon Software International to the Management Group at Horizon.

While both of these separate transactions came together very quickly once the terms were agreed on, we had in fact been in discussions with these and other buyers off and on for quite some time. A number of factors finally came together and we were able to put together deals that we felt reflected the value of these assets and were a win-win situation for both the ISC shareholders, the QS employees and the QS and Horizon buyers.

As we pointed out in the press release, these two transactions were the major factors contributing to our $7 million in net income in the third quarter and $5.8 million in net income for the nine-month period that and resulted in an increase in our shareholders' equity to $7.8 million at the end of September. As you know, earlier this year, we received notice from the American Stock Exchange that our shareholders' equity had fallen below the $4 million minimum, and they had accepted our plan to increase our shareholders' equity to regain compliance within an 18-month period.

We had already been in preliminary discussions regarding the QS and Horizon transactions as part of our regular practice, even before the original notice from AMEX. And with the completion of the two deals, we expect that we will be able to demonstrate two consecutive quarters of acceptable shareholders' equity in early 2007, barring anything unusual that we're not aware of at this time.

We used the proceeds from the sales to pay off completely our bank line of credit, so that at the end of September, we have no debt, cash of $3 million and notes receivable totaling $4.3 million, of which about $3.3 million will be paid to us within 12 months. There's also some potential for additional upside gain on the QS sale, depending upon certain performance milestones during 2007, but even though I think we will get those, we've not factored any of that upside into our reported results because we cannot quantify the amount or probability of getting them at this time.

I should note that the financial results reported for the quarter year-to-date shows QS as discontinued operations, so that the comparisons between '06 and '05 reflect results of the same three subs in each year. Those three subs are ChemFree, CoreCard Software and VISaer. Excluding the two non-recurring transactions, our remaining three subs continue to make progress on their plans, with ChemFree in particular experiencing some solid revenue growth throughout '06, which are reflected in the results reported today.

I would reiterate what I've said in the past about the unpredictability of our results on a quarter-to-quarter basis, particularly for our software subs, VISaer and CoreCard, and in fact their revenue and profits are likely to fluctuate I'd say substantially and dramatically as a result.

As we've discussed in the past, VISaer and CoreCard are bringing the market very complex, sophisticated, mission-critical products. It's a very time- and resource-intensive process for both our companies and our customers, and we're grateful for support and hard work of our employees and customers during this important phase.

I'm going to take time now to talk briefly about each of these subs, maybe say a little bit more than we've said in the past, since we have become a simpler Company, and the Company is primarily made up of these three subsidiaries at this point in time.

First would be ChemFree. We had another solid, good, profitable year so far, with revenue growing over 30% year-to-date. Sales of both the parts washers and the consumables showed strength across multiple channels. Seeing results of new initiatives in 2005 to increase sales direct to large corporate volume customers has been real important. We've got some recent good wins. Home Depot Rental Centers have put one of our parts washers in each of their stores; that is about 1000 stores. Sales volume of parts washers sold to this channel are up sharply in Q3 and year-to-date 2006. We have other good prospects in the pipeline, but given these kinds of sales, you are going to see volume irregular by the quarter.

We've also had growth in the domestic distributor channel. Napa is a good example of our domestic distributor channel. Also growth in lease revenue. We have Pep Boys and Firestone as examples of lease revenue.

We still have significant legal expenses that reduced our profits due to conflict over the patents. We estimate that over $500,000 will be spent in 2006 to protect the patents and to go against infringers. The company would be significantly more profitable, obviously, if not for the legal fees. We do expect to continue spending dollars over the next -- I'm going to say six months or so. Hopefully, they will wind down somewhat after another six months, as we do have a good number of things presently in arbitration. Arbitration, even though it is still expensive, is much less expensive than doing everything through the courts. So, legal fees continued to cause us a bit hit at ChemFree, but business is good.

VISaer, the dynamics of the airline industry continue to affect demand. New product decisions and timeframes make planning difficult. Right now, the major focus for VISaer is to establish strong reference accounts for its new Web version of its software for the maintenance, repair and overhaul, and engineering operations of the aerospace industry. And we still continue to service some very strong existing customers in multiple countries.

We've recently reached an important milestone when we delivered our new release of the Web version on a multiyear contract with China Southern Airlines. China Southern is one of the largest airlines in the world. We expect to have a second phase delivery in the next few months. All the revenue from this is being deferred until the software is accepted and implemented, and I expect that to be probably late 2007.

VISaer does have a base of established customers in both domestic and international markets that generate professional services as well as support revenue. It's fairly consistent in terms of the revenue of professional services and maintenance, although we get occasionally a one-time bump-up in professional service. We had that, I think, in Q1 related to completing a multiyear contract.

We've got several of our current customers that are considering migrating to the VISaer Web product, but that will not take place for probably 12 to 18 months out, although it will be large sales at that time.

VISaer is pretty much at a breakeven basis; it loses a little bit, it makes a little bit. But I'd have to say, even though the software is in good shape, we like our position, it's still a very difficult environment, and I don't want to be too positive about the future, even though I have high hopes for it.

CoreCard Software. We're continuing to add new significant new product functionality to address our target markets and our customers are working closely with us on the business requirements and functionality for each application module. We have a number of contracts that we're working on, and we expect to deliver and recognize revenue in 2007, but do not expect any of this revenue to be recognized in 2006. Well -- it is the wrong word; there will be some, but there will be large amounts recognized in 2007 based on current customers that we're working with.

In the past three months, we've signed two more contracts for our private-label offering, as well as our first major bank card customer. All of this is for delivery in 2007. We basically have a backlog at this point that is utilizing all of our resources. In addition, we've delivered the first release of our application for fleet card management to a major customer for implementation over the next three to six months.

We're confident that there are significant markets for CoreCard Software. At this point, we're spending almost no money in marketing and no money on sales, and yet we have good traction with potential customers. We're adding to the development and testing resources in India and Romania. We currently have approximately 75 of our own employees in India, a wholly-owned sub there. We have about 40, 45 employees in Romania. And we're also adding some business analysts domestically to support current contracts and position the Company for growth. We actually have about four times as many employees offshore as we have in the U.S.

Our focus is on delivering under existing contracts, selectively adding new customers, providing a solid base to be able to scale the business. I believe that CoreCard -- the real tipping point will be after we get installed this first bank card customer. That should be installed by the middle of next year, and we should be able to find bank card customers around the world that would be in interested in what we have.

So, a quick summary in closing, 2006 focus continues to be on execution and ensuring that fundamentals are in place to profitably grow each business. We expect that the operating losses and cash requirements will be lower in 2007 than in 2006, although there will still be considerable variation from quarter to quarter and from subsidiary to subsidiary. Our improved financial condition is probably sufficient to support our plan, so we don't have any problems there.

I guess with that very quick overview, we will open the lines up for any specific questions you may have.

(OPERATOR INSTRUCTIONS) Sam Robotsky with [SAR] Asset Management.

Good morning, Leland. I assume Bonnie is there also.

She is. She will take the hard questions.

All right. I think -- not I think -- this was tremendous, the value that was generated from the sale of your transactions. And it's very difficult for the marketplace to value this, I guess as the American Stock Exchange had, before your transaction was closed. It would appear -- is there a way to sort of -- whether it is in a press release or in some way -- to talk about comparable companies that CoreCard, VISaer, Inc. and ChemFree compete against or are in the space they are, so that the market could value these things better than they have been up to now?

That is a good question. I guess taking it one by one, it's a little difficult, because CoreCard --there's really nobody in the U.S. at least that's doing what CoreCard is doing in terms of selling this kind of complex software and licensing it. There are people that use it, like VISA and First Data, but they're so big, there would be no valuation comparison there. So it would be difficult to find a comp for CoreCard; I think that would be the biggest problem.

ChemFree, probably the same problem also. There is nobody that does bioremediating parts washers, and everybody else in the business are big guys. Safety-Kleen, even they don't do much bioremediation -- in fact, they sell our unit in some places. There's nobody small. I think to get a reasonable comp, you'd need to have someone at least no more than four or five times the size of our Company, not someone 100 times, to get a comp.

VISaer, I'm thinking also -- no public company that would be comparable. You have SAP sells software that does this. There is a company in Canada, but it is private, so you have no valuation comps.

It would be nice to do that and we will think about that, maybe by listing some of our competitors. But right off hand, I can't think of public companies that would have a valuation that would help us do a comp.

Well, basically, just the fact that you had the ability to get the valuation on the pieces that was sold, where you had below $1 million of equity and you created in excess of $7 million, $8 million from these situations. Unfortunately, the market place doesn't look at that.

Now, going forward, I guess the CoreCard, by going into arbitration, hopefully that will keep the legal expenses down. Do we think there is a solution in the next year or so, or that we could eliminate the legal expenses and resolve or get a royalty agreement with somebody?

I thought there was a solution two years ago. So I'm not going to be a good --

I meant ChemFree, I'm sorry.

I know that. But as I say, I thought we had solved some things a couple of years ago. So I'm not a good predictor for this. I just don't know. We're just taking it step by step.

Okay. I'm going to step out and hopefully there are some other people who have some questions and I will come back in.

Thanks.

Good luck. You really have done a good job, Leland.

Thank you.

(OPERATOR INSTRUCTIONS) [Eugene Riley], a private investor.

I'm sorry -- I might have been distracted during part of the call. I was curious to know about the -- your defending your intellectual property for ChemFree, and what is the status of that lawsuit?

I just said we are in arbitration on that at the present time.

Okay, I'm sorry. I guess I got distracted. Thank you.

Sam Robotsky with SCR Asset Management.

I guess the basic really situation that I see, is there a way -- I mean, it's difficult for people to write about you, analysts or anybody. But somehow it would be nice if there's more -- some information that can quantify or pinpoint going forward that would be some greater interest in the security, and that's --. I don't know how to achieve this; it's difficult. And I'd rather own the stock the way it is. But it would be nice that there was a greater consideration to what an appropriate valuation is until a trigger event occurs.

So I guess -- I don't know how you're going to do this, but hopefully you could figure something out, Leland.

Yes, I understand the frustration. Again, we are a small cap company; that compounds the problem. And the fact that we're a small-cap company that has three very diverse types of businesses makes it even more complicated to get interest.

Yes. Well, good luck.

All right, thanks.

Thank you.

There are no further questions at this time.

All right. If there are no further questions, we appreciate those of you who have been on the call. Again, as we typically say at the end of the calls, if there are any other things that we can do for you, please give either Bonnie Herron or myself a call. We appreciate your owning the stock. We still have a lot of positive feelings about where we are headed. So appreciate you hanging in there with us. Thanks a lot. Bye.

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