CoreCard Corp (CCRD) 2009 Q3 法說會逐字稿

Good morning. My name is Nikesha, and I will be your conference operator. At this time, I would like to welcome everyone to the third quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. (Operator Instructions).

I will now turn the conference over to Mr. Leland Strange, CEO of Intelligent Systems. Sir, you may begin.

Good morning. Welcome to the Intelligent Systems Investor conference call. You probably recall those of you that were on the last call, that in August I said we would be doing quarterly conference calls, so we are going ahead and doing it, even though there hasn't been a lot of change since the last call. For that reason, it is not likely to be a long call either. During the time today though, what we will do is simply review the third quarter and the year-to-date results, with a focus on our ChemFree and CoreCard Software subsidiaries. I am going to assume that you all have a copy of the earnings release from this morning. I don't plan to repeat all of the information that is in the press release. At the end, we will have some time for a few questions and answers. Our Form 10-Q with more details will be filed tomorrow with the SEC, and it will be available on our website at IntelSys.com.

Let me remind you that the call is primarily intended for current and potential shareholders, to learn more about us and to ask questions, but everyone including myself, has to be aware that in comments and questions, we typically see on our call logs, employees, current and potential customers of CoreCard and ChemFree, even potential acquirers of those entities, in some cases, opposition lawyers for an ongoing litigation situation, as well as others that we have no idea for why they are listening. Keep that in mind as I will try to keep it in mind as you do also, as we go through the Q&A. Now as far as some of the legalese that we need to do here, the forward-looking statements.

Before I start with the presentation, I have to remind you that the discussion today may and probably will contain forward-looking statements that relate to Intelligent Systems. All of the statements on trend analysis and other information that is contained in this discussion, as well as statements or comments, with words such as anticipate, believe, plan, estimate, expect, likely, intend, and all other similar expressions constitute forward-looking statements. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance, and involve risks and uncertainties. Actual results will probably differ from those that are contemplated by those statements.

All of the statements are available on the information that we have at ISC today. I can give you my best judgment of things as I see them, and that judgment might sometimes be wrong. But it is given for no purpose other than to let you know what I personally think. Take it that way rather than as a prediction or an absolute. As you all know, I don't always read the script, so you have to take that into consideration.

Talking about our financial results. The reported results that you find in our press release, they do include the effect of the rights offering. That means that the cash and the shareholders equity shown in the Q3 balance sheet, does include the money that we received from the rights offering. Also based on our current equity, we should technically be backing DuPont, with the continued listing standards for the New York Stock Exchange, AMEX, but we expect it to take another quarter before the Exchange will confirm this.

As you can see, our loss from continuing operations is lower in 2009 versus 2008, both in Q3 and year-to-date. The main reasons for this are continued profitability at ChemFree, with favorable mix of fluid and filter supplies with good margins. For Professional Services and license sales and lower costs at CoreCard, and also across the Company expense reductions that we implemented in late 2008. By the way, we have now reinstated some base pay back to some precut levels for most employees. Even though you find the employee, or the unemployment to be fairly high, the employees we have are technical, and experienced in our business, and we want to make sure that we keep them. We haven't done raises, but we have reinstated the precut salary levels.

Also, 2008 included a $2.9 million gain on the sale of VISaer, although that is in discontinued operations, so the year-to-date results are not directly comparable. We talk about the ChemFree subsidiary specifically. It was solidly profitable in Q3 and year-to-date. Q3 revenue was slightly lower than in [Q2], but it was the third consecutive quarter in 2009 for revenue growth, and we are on plan for the year. 2008 comparison was a spike that was due to a rollout at [Syntas], which is a significant customer at ChemFree. We never expected to continue at that level, so we have made good progress in 2009.

We have at ChemFree a significant fluid cultures installed base, and we have continued to sell to those, and that is represented in the numbers. The revenue is trending up in the domestic market, and we also begin to see renewed demand in Europe in Q3. We have a new fluid blending arrangement in the UK to reduce shipping costs, and improve our price competitiveness in the EU. It will lower the topline sales, but will earn the same gross margin on each unit of fluid sold in EU, and we believe there is potential for increased volume as well. So you can be prepared for perhaps not favorable comparison on the topline because of the lower fluid revenue, but our gross margin as I said will remain the same or higher.

As far as legal, which has been a big part of ChemFree for the last four years, we explained in the last call that we had the trial, it was held the week of July 13th in front of the Judge. Got two immediate rulings in ChemFree's favor that was on inventors, inventorship and infringement, there are still a few for the judge to rule on, and it has to do with some new things setup, some new legal theories that have come out,pre Court has ruled on, since we have actually brought this case in court. At this point, we have no idea as to when the Judge will rule. I said the last call I expected it to be by October. Our lawyers expected it to be by October, so logic did not prevail.

At this point we have no idea, those of you that know this court system know that federal judges can do anything they want. We had a very good judge, we think we had a judge that understood the facts very well, though for reasons unknown to us, he has not yet ruled on the case. We did have significant legal expenses in Q3, they were around $350,000 but they have dropped to almost nothing in September and October, as we wait for the judge to rule. There will be a next phase in legal.

We don't know what that will be. The option will depend on how the judge rules on the final issues. We will I am sure have some more legal expenses going forward, but this quarter should be a good one, as we have no legal expenses at ChemFree. Or almost none. So that is the ChemFree overview.

Let me give you a little bit about CoreCard. Our revenue from licenses and services were up in Q3, and also in year-to-date versus 2008. We have more customers and we have more projects going on. Our Professional Services revenue varied a lot by quarter, while our maintenance is predictable and continues to increase. One good thing to happen in the quarter is that we signed our first international contract, and we expect to be live in that in early 2010. It is not a real large one, but it could be the beginning of something that could be very significant with that same customer.

We have deferred revenue of approximately $1.2 million for in-process contracts. The timing of the revenue recognition depends more on the customer than CoreCard. We can be ready for going live, and yet the customer for their own reasons is not ready, and we cannot recognize until they actually go live and start using the software. Therefore, the license revenue is going to be very bumpy quarter to quarter, based on how we account for revenue recognition, and we have no control on that, and I again caution you in trying to compare CoreCard results quarter-to-quarter, it is going to be impossible to get a good feel for how we are actually doing, based on the way we have to report revenue.

I would say the customer prospect pipeline is very good. We will be announcing several new customers in this quarter probably. And we continue to be very optimistic. We are finding that the business requirements continue to shift. The business is, particularly Prepaid Market continues to get more sophisticated, and we are trying to actually develop a leadership position at that, at the current stage I would say we are equal to most people. Better than many, probably not behind anybody, but it is a moving target and we are going to devote a lot of resources to keep moving.

The key focus for the company is to improve delivery of our services, and determine the best way to increase productivity, and to scale the business. We will be determining the best course and the timing for using the rights offering proceeds, and as you know we received more than planned. We are either going to, well we will be doing some increased marketing, more work on the website, more PR. We are establishing what we call a boutique processing business. We are going to add more engine resources. We think we have a competitive advantage there, and there will probably be some management adds.

This is a thriving company, with I think very, very good possibilities at CoreCard, so we are going to make our investment there. That is basically the overview of what is happening at the Company now. As I said, it was going to be fairly short, but I think I have covered all of the key elements.

So I will turn it back over to the operator to see if there are any questions that we can answer at this time.

(Operator Instructions). You have a question from the line of [Al Shan].

Leland, good morning.

Good morning.

Thanks for that overview. A couple of quick questions. Number one, are we making any other investments in other companies other than these two?

The answer, Al, is that we have not. We remain open to small investments. We want to keep deal flow here, so you will not see us making any major investment in other companies. unless, let me put a caveat, unless they are directly related to ChemFree or CoreCard.

Okay.

We are likely to make an investment against all investment in a company that we think will be beneficial to CoreCard shortly, but we are talking about in the $100,000 range.

Okay.

So we are open to small ones like that but we don't see anything major.

Okay.

We really want to push pretty much what we have, keep flowing the water out there, as a place people come.

Okay. Now, we do have a few other small investments that we had made in prior years. I mean other than ChemFree and CoreCard, I mean that we are still working with, are there a few small ones still?

Yes, we have three or four out there. I don't expect big returns from any of them. There is only one that potentially could give us a pretty nice pop. But we are not making follow-up investments in those, and for that reason we continue to get dilution.

Okay. Okay. And then how much do you think we have spent in legal expenses on ChemFree over the past, say three years, say an average per year?

Again, I would have to look it up but I'm going to say it is probably $2.5 million over the past four or so years.

Okay. Okay. And now at this point that expense is behind us, pretty much.

Not totally. That is behind us, but in terms will we have more legal expenses, yes. Because if we win the lawsuit, whether it is totally or partially, you can expect the opposition to appeal, and so there will be expenses there. And if we lose it, then we will be appealing, so yes there will be more legal expenses, but not to the magnitude of what we had in the past at all.

Okay, good, good. Okay, thanks for the update. I will let somebody else pose a few questions.

Okay, thanks.

Your next question is from the line of [Sam Lebaugh].

Good morning, Leland.

Hi, Sam.

This is I guess more or less in line with what would be good expectations. You sort of addressed that both the ChemFree and the CoreCard, well CoreCard seems to be more opportunities opening up, and it doesn't seem to, is it impacted in any way by the economy? Is there money available? Do you find that there is more money flowing into deal with CoreCard than say six months ago? Are people more prone to open the spigot?

No. I don't see much difference. I think the spigot is open enough for us to do what we need to do, and what we can do. But I don't see any change. And really, that business, I guess the big deals probably slowed down, but we weren't looking at the $2 million and $3 million deals, we were looking at the $300,000 to $1 million to $1.5 million kind of deals, and those are still flowing.

Okay. And as far as ChemFree, I mean you had your big deal previous with the rollout of Syntas. Do you see another Syntas down the road, or just keep building and expanding internationally and various other ways?

No, I don't think I would expect another Syntas. There are certain kind of deals that once they take that particular market, there is not another one there for it, but we will continue to expand, and we will have some, many Sintases perhaps internationally.

Okay. Are there any particular conferences particular to ChemFree where these are highlighted what you do, the fact that it is good for the environment, et cetera, that you sort of exhibit?

Well, we do but when you think about it, I am going to use an analogy that people around here don't like me to use, but I will use it on a conference call, and it will be recorded for posterity anyway. What we have a trash can. In terms of ChemFree, that is where they put their dirty parts, get rid of their bad stuff. Now you don't really have conferences for trash cans, you know what I mean, in terms of selling, and things like that. Now you have conferences for people that, for office supply companies that use trash cans, and likewise the ChemFree conferences are for people what are buying all kinds of equipment, and we are simply a very small part of it, so you can imagine whether you are a General Motors manufacturing plant, they are making use of thousands of these, there is nobody really going to focus on the trash cans there.

So yes, we go to conferences, but I want to emphasize this is not the kind of thing, that somehow you will change the world on because they just don't see that. It would be like having a new trash can liner, for example, that is green. You have some very, you have some people within some of those companies, who are looking for a way to make sure that they can try to make their company look a little green, and that is good for us, because they can pick this, and we are very green. It is a good product. But my point of the trash can analogy, it is just not something that a company, management is typically going to focus on. It is not part of their results you know what I mean?

Yes, yes, Leland. I have another comment, and you might sort of, we might get some kind of feedback. The stock, the amount of volume the stock seems to have dried up, but over a period of time, there seemed to be an erratic large spread on the way the stock is traded, whether the specialist is having difficulty, or in the third market, the market makers are taking advantage, I am seeing the stock trade as low as $0.90, and possibly on the New York AMEX, maybe as high as $1.50, and possibly in the third market, as high as $1.94.

Now, the question, it is not substantial volume, now, the question is really, Al Shantz may have an idea, or anybody else on the line besides you, but it would be interesting to know, if there is any rationale for this widespread, and something I guess it would sort of probably break down as supply and demand, but the market makers and specialists should be tightening the vend. Do you have any ideas or does anybody have any ideas why the stock is trading in such a wide disparity?

Well, obviously we don't know. As you indicated, a lot of it is traded off the New York AMEX Exchange, it has been third-party, so we don't know. I will leave it, we will close this question, and see if someone wants to give their idea, as part of the Q&A.

Okay. Wonderful. Leland, you are doing a good job, keep up the work. Hopefully there will be some improved profitability, or you will resolve the ChemFree legal situation. Good luck.

Thank you.

(Operator Instructions).

If any one wants to comment on what he asked, go ahead and take the line.

(Operator Instructions).

All right. I assume if there are no questions or comments, that means, Sam, that nobody has an answer, nobody has any idea, and we certainly don't. Let me just say we appreciate you folks taking the time to listen. It will be on our website for a while, and if you have questions that we could answer directly, feel free to call us. We are just going to keep plugging away at what I have said we are doing. Thanks, everyone.

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