CoreCard Corp (CCRD) 2006 Q4 法說會逐字稿

Good afternoon. My name is Durika 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. [OPERATOR INSTRUCTIONS]

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

Okay, good morning. Welcome to the Intelligent Systems quarterly conference call. I said good morning, it's actually afternoon, 1:00. Many of you have joined us on past conference calls and we appreciate your continued interest in the Company. We will go ahead and follow the same format that we've used in our most recent calls and that is, we'll do a brief overview of the financial results that were contained in the press release this morning and then provide an update on the operations of each of our three primary subs. As the moderator said, we'll leave time at the end for any questions that you might have about the press release or about our operations. The call is being recorded and we intend to post it on our website at intelsys.com and it'll remain there for 12 months. We'll also be filing our Form 10-KSB with the SEC before the end of the month.

Before we start I need to get the legal stuff out of the way as we usually do. I'll be making some what will 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 the information that's available to us at this point. 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 you on these changes that might occur. I do encourage you to read our10-KSB, which contains a more comprehensive explanation of our business 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 was issued this morning and that you have it with you to refer to. The fourth quarter of the year was rather uneventful and more business as usual after a particularly busy third quarter in which we completed the sale of our QS Technologies business and also the sale of our 17% interest in Horizon Software International. As we pointed out in the press release, these two transactions were the major factors contributing to our $4.5 million in net income for our fiscal 2006 year. We used the proceeds from the sales to pay off completely our bank line of credit, so that at the end of December we have no debt, cash of a couple of million, notes receivable from the QS and Horizon buyers totaling a little over $4 million, and we have shareholder's equity of a little over $6 million. There's also some potential for additional upside gain on the QS sale depending upon certain performance milestones during 2007, but we haven't factored any of that upside into our reported results because we cannot quantify the amount or the probability at this time and it is not a large, significant amount, but there is some upside.

The financial results reported for the quarter and the annual periods show QS as discontinued operations so that the comparisons between '06 and '05 reflect results of our remaining subs; that's ChemFree, CoreCard Software, and VISaer. Excluding the two non-recurring transactions, our remaining three subs continued to make progress on their plan, I think with ChemFree, in particular, experiencing solid revenue growth throughout 2006. I've said in the past that there is considerable unpredictability of results on a quarter-to-quarter basis, particularly for our software subs, VISaer and CoreCard, and that our revenues and profits are likely to fluctuate substantially as a result. This is exemplified and made apparent in the fourth quarter results in which we did not recognize any significant new software license revenue at CoreCard or VISaer. But from an operations perspective, we have a number of contracts on which we expended significant effort and expense in '06 that will be delivered and recognized for GAAP reporting purposes in '07.

So there is that continuing gap between GAAP reporting and cash and what we actually do. That's what makes our quarter to quarter very difficult to compare. Our principal focus and where we're spending our time and money now is on our three subs. We think that concentrating on these operations will have the most impact on our value over the foreseeable future. We do still have a small number of a number of minority investments which we think will be successful, but they're not of a size that will have a big impact, so although we're always open to new opportunities if the right one comes along, it's not an aggressive part of our strategy at this time.

Let me now try and touch briefly on each of our sub -- subsidiary's operations. I'll start with CoreCard. We're continuing to add significant new product functionality to address our target market and our customers are working closely with us on the business requirement and functionality for each application module. It's difficult for me to explain or tell you how big this product is, but it is huge and it's the kind of product that's never finished, but nevertheless it offers a tremendous amount of functionality. To give you one example of just the size of the product, if you look at the processors, like First Data or [Thesis[, it's my understanding that Thesis spent well over $100 million on their current version of the software because of the depth and the difficulty and the size. And our software is of similar complexity to the one they spent over $100 million on. And by the way, we spent a lot of money too, but that's just to give you an example that it is a huge software development.

We do have a number of contracts that we're working on at CoreCard, and we expect to deliver and recognize a fair amount of revenue in 2007. Without identifying names -- which by the way most customers require us in the contract not to put out a press release or identify them for a lot of competitive reasons -- I'm going to go ahead and mention a couple and give you a couple descriptions that are in the pipeline. We have a bank card customer that's a Middle East bank that actually has been proven to be a very challenging and demanding customer. They're of a fairly decent size and we signed the contract six months ago, but in the meantime, there's been a complete change in the bank's IT management and management for this project, which has greatly complicated the process, decreased the scope, required significantly more people and time on our side.

It's not going to be a particularly profitable contract. It's not a loss, but it may be just be break even, and we're trying very hard to deliver an excellent, very sophisticated bank card product that will be our base bank card product for other banking customers, particularly in international markets. This is something that will take us a year to fully implement. So while it's nice to have and it expands our knowledge in that marketplace, it's very challenging and we would probably be better served if we had had a smaller customer to start with doing the same thing. And frankly we're looking at trying to find and believe we have the potential for a smaller customer that we might could even deliver first.

In addition to that one, we have delivered our first Fleet Card application to a major Fleet customer, of which that customer is owned by a bank. now in customer testing and we're refining final deliverables and we hope they will move to implementation by the summer. And likewise, we hope we can recognize that revenue, which is in excess of $1 million this year. We have several smaller contracts, which we expect to have implemented also over the next three to six months. One of them is a card processing system for a large dental management company. That is being tested by the company now in unit tests. That should be installed and going live sometime in the next two to three months. We also have another one with some other Fleet -- major Fleet customers that are not primarily Fleet but they're with -- they're using MasterCard.

In the first quarter of 2007 we're going to recognize just over $1 million in revenue related to our first B-to-B software contract. This particular customer is a BC-backed company that was planning to move into a new line of business using CoreCard's product as its system platform. Unfortunately, the customer has had to refocus on its core business and will not be going forward with the CoreCard implementation. However, we had an excellent relationship with the customer, the project was on schedule, and we reached an amicable termination of the contract in February, and the course of the contract paid us over $1 million, including a termination fee. This B-to-B product is well along in its development, and with customers input we believe we have created a product that addresses a very large market in the accounts receivable area. We're prioritizing our efforts in the immediate future on our other contracts that will go live in '07, but we do expect to refocus on this B-to-B product a little later, but it was a profitable contract for us.

One of the card areas that's experiencing strong growth presently is the prepaid card market. While the functionality required in this market today is less robust than what our software platform delivers, we believe we can leverage our development efforts and provide a software solution that meets today's needs while also providing more of the features and functionalities that will be demanded as the prepaid card market matures. We are presently evaluating how to best address this opportunity. We continue to add to development testing resources in India and Romania. Some business analysts domestically also -- and some business analysts domestically in order to support our current contracts and leverage our U.S. work force.

We presently have close to 100 employees at our Indian subsidiary and about 40 in Romania. And I'll remind you who are new to the call, these are our employees. These are not outsourced employees, they are employees of our Company. We are still not spending the effort on sales and marketing, but expect that as we deliver on our in-proc con -- in our process contracts, we will step up the sales and marketing efforts in the latter half of 2007. If we had more sales right now, we simply couldn't deliver, as we have all of our people very, very business working on the contracts that we have in-house. So all in all, we're obviously very positive on the future of CoreCard as we move forward.

Now let me move to ChemFree. We had another solidly profitable year in 2006, with revenue growing 28% compared to 2005. Sales of both parts washers and consumables showed strength across multiple distribution channel, and particularly in the domestic markets. I'm pleased to report that in early February this year, ChemFree won an arbitration proceeding related to a dispute with [Zimo] Corporation that was related to a patent co-ownership agreement. This is something that's been going on for a long time and we've constantly had a dispute. The product was developed here at ChemFree and then Zimo, for various reasons using some other employees got involved with it and we've had to deal with them for a long period of time. The arbitrator found for ChemFree on all substantiative issues and awarded over $150,000 to ChemFree for legal fees and related issues. While we are pleased with this outcome, unfortunately ChemFree will still be spending considerable legal fees to protect its patents and go after infringers. We think it's very clear that we should continue these efforts both in the U.S. and Europe, and we can now focus on what actions to pursue and what resources to spend. There are people, including some -- at least one large company that we are currently in litigation with in the U.S. Bonnie, what's the name of the company?

J. Walter.

J. Walter, we have sued them for patent infringement in the U.S. It's highly likely we will now also do the same thing in Europe. We believe it's very important to continue to spend whatever we need to spend in legal in order to maintain the value of the Company for the future. Without these legal expenses, ChemFree's profitability would be considerably greater, but we continue to believe that long-term the right course of action.

In 2006, ChemFree saw the results of new initiatives to increase sales direct to large-volume corporate customers. Some recent wins -- an example, the Home Depot rental centers -- the sales volumes of our parts that were actually sold through this channel are up sharply in 2006. We've got other prospects in the pipeline, one of which could be quite significant in volume. But we expect the sales through the direct channel may be more irregular on a quarter-to-quarter basis then ChemFree's traditional distributor market was. 2006 results also included stronger sales in the domestic distributor market as well as from leased equipment revenue. Sales of fluid and filter's to ChemFree's installed base of customers -- and that's the key to the future, we think -- obviously is the razor/razor blade idea and the fluid filters are the razor blades. They did increase and represented a greater percentage of total revenue than in the past and we hope that continues in that pattern.

So the third sub is VISaer. Several years ago in response to uncertainties and turmoil in the airline industry, VISaer's scaled back its marketing sales efforts, as well as its domestic work force. It's focused its efforts on establishing strong reference accounts for its new web version software that allows airlines and third-party repair shops to manage their maintenance, repair, overhaul, and engineering operations. At the same time, VISaer continues to do maintenance and professional services work for its existing base of large airline customers in multiple countries. It's difficult to evaluate the near-term market for software sales in this dynamic industry, but we do know that our efforts and focus are yielding a very good, solid product that will be very competitive in the market.

An important milestone, we recently delivered Phase 1 of the web version of our VISaer software on a multi-year contract with China Southern Airline -- that's one of the largest airlines in the world -- and we expect to have a second phase delivery in this year. We're encouraged with the overall progress and good relations with our customer and expect to continue to meet our milestones for the rest of this significant contract. All revenue -- this is important to remember, all revenue is being deferred until the software has been accepted and implemented. We think that will happen before the end of '07, but it easily could slip to '08 in terms of being able to recognize the revenue. VISaer does have a base of established customers in both domestic and international markets that generates good professional services and supports revenue. Several of its current customers are also considering migrating to the VISaer web product in the next 12 to 18 months.

I guess in summary and in closing, I'd say that 2007 focus continues to be on execution and ensuring that fundamentals are in place to profitably grow each of these three businesses. We're in good shape from a cash position and we expect that our GAAP-reported results of our continuing operations will improve as we're able to recognize more GAAP revenue from software contracts this '07. We do continue to pay the increasing price of being a public company, with increases in time and money spent on audit, legal and compliance costs. In 2007 we'll be spending considerable management time and expense on our 404 internal control processes, which do not drive the operating business forward, but they are a requirement for even microcapped companies like us. At this point it does not look like there'll be any further exclusions or postponements for non-accelerated filers, so we're moving forward that with that kind of work on that basis. That's something our Bonnie, Herron, our CFO, will be spending a lot of time on for the rest of this year, and as you can imagine audit and other expenses continue to increase as they continue to clamp down -- or clamp the vice on the auditors. some types of questions.

So with that very quick summary, trying to give even the new folks on the phone a little bit of background as to what we're about, I would be delighted to open it up for questions and answers. And I'll be happy to answer the questions that I feel like I can answer from a SEC perspective, and I hope you'll respect I'll have to decline, perhaps, some types of questions. So, moderator, if you'll open it up for questions, I'd be happy to take those.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of [Al Shams] with MidSouth Capital.

Leland, hi, good afternoon. You had mentioned, what -- we have about $2 million in cash and about $6 million in receivables; is that correct?

I don't think I said $6 million in receivables. I said -- I'll have to pull out my balance sheet. I said we have $2 million in cash and --

I think it's $4 million in notes receivable.

There's $4 million in notes receivable, that's not AR.

Okay, okay, okay.

By the way, that's as of the end of December. We've collected a good chunk of that at that point, so that's not -- we're obviously not reporting our margins now, we're reporting the December --

Right. What else was on the balance sheet in terms of current assets as of December?

What else -- you have the balance sheet I think with the release out.

Oh, okay, I didn't see it.

Yes, that was --

Oh, okay, I'll take a look at it. Then secondly, any estimate as to what the Sarbanes-Oxley compliance cost might be? You alluded to that?

Not by itself, but I'm going to -- I'll ask Bonnie to chime in, but my guess in terms of our accounting type and Sarbanes-Oxley type things are in the range of $0.5 million, counting Bonnie's time. It depends on what she spends on it, $400,000 to $500,000.

Wow. Okay. I hear you. Wish there was a way around that.

Right.

And then, lastly, any reason why you're not seeing any really good opportunities to invest some capital?

We're seeing some opportunities, but I think we believe for the opportunities we see, the best opportunity is internal right now.

Okay.

We're going -- we'll obviously be -- we'll obviously look and be open, but we think we have lots of opportunity with what we're doing now. There's going to be a time to ramp up the expenses at CoreCard from a sales and marketing perspective --

Okay.

-- and there are just other things. We're pretty comfortable with where we're headed, but our eyes are still open for other opportunities.

Okay, I got you. Thank you.

Your next question comes from the line of [Nome Grome], a private investor.

Hi, Leland and Bonnie. I'm sorry I have a poor connection here. Could you give us an indication of ChemFree's operating earnings before legal expense in the last two years?

I don't think I want to split that out because I don't know that I want ChemFree's competitors to know exactly what we're spending on legal. I will tell you this past year it would be something over $0.5 million, but I'm not going to get any more precise than that for a competitive reason.

Okay. Could you talk a little bit about cash flow at VISaer and CoreCard in terms of when we might expect [inaudible] on cash flow positives, how that's looking?

Well, I'm going to give you -- I'm going to give you a very, very rough that this year we would expect VISaer to be roughly break even. We expect CoreCard to lose between $1 million to $2 million on cash flow. Our burn rate's about -- is around $5 million and we expect to lose maybe on a cash basis $1 million, in that range. But that's being very, very rough.

Okay. So you're looking for the whole year on a cash basis to spend about $1 million to $2 million across all the subs?

No, no. That was CoreCard, $1 million to $2 million at CoreCard.

Right. And the other two would be roughly break even or cash flow positive?

Well, ChemFree would definitely be break even or ChemFree positive. VISaer, depending on other decisions we make on VISaer, but budget-wise we show them about break even, but I can see that we might do some other -- other stuff that might cause some negative cash. And then we have corporate. The overall corporate expense is about $1 million, that's negative.

Okay. So all combined, a couple million perhaps?

Your words, not mine.

Okay. What's roughly the total cash invested, not in the individual companies, but in the software segment combined?

Well, that's a very hard number to come at. How many years, ten years, five years. and I just don't think I want to get into that -- the answer to that kind of question.

Okay, I'll save the other ones. Thank you and thanks for the update. It's nice to hear.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of [Jeffrey Rothenberg] with [Moth and Rothenberger].

Good afternoon.

Hi.

I recently saw an article in the local paper that Delta Airlines was switching their MRO and they had talked about -- they mentioned JetBlue and China Air and UPS, and those all names -- are names that had been associated with the software work that VISaer has been doing. So I was wondering if there was any connection between that switch and possible new business for VISaer?

Well, there's actually not. Delta will still contract out with third parties, so any business we did would be with some third party. Now if Delta uses China Southern, for example, for some of their -- for Asia stuff, it's likely that that would mean some revenue to us, but there is no deal thats struck there. See, most of our customers pay us based on the number of what we call seats, the number of installations they -- the number of people who access a system at any one time. Obviously, if any of our customers end up taking on contracts from other people, it usually means an increase in the number of seats. But we don't see anything -- we don't see any direct impact of that at this time.

Thank you.

At this time there are no further questions.

All right. Well, again, thank you for showing the interest and being on the call. We hope that we can continue to provide some insight in the future and hope that we'll be able to have a good year. If you have other questions that you think that we would be allowed to answer that we didn't or need more clarification, please feel free to call Bonnie or myself. In the meantime, thanks and have a good day. Bye.

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