CoreCard Corp (CCRD) 2009 Q4 法說會逐字稿

Good afternoon. My name is Jenna, and I will be your operator today. At this time I would like to welcome everyone to the Intelligent Systems shareholder conference call. All lines have been placed on mute to prevent background noise. After the speakers' remarks there will be a question and answer session. (Operator Instructions). Thank you. Mr. Leland Strange, you may begin your conference.

Thank you. Good afternoon, everyone and welcome to the Intelligent Systems investor conference call. I assume that many of the people on the line today probably attended our last conference call in mid-November, 2009. As I did then, during I think probably less than 30 minutes, I plan to focus on our ChemFree and our CoreCard software operating companies and update you on progress since the last call, also briefly review the fourth quarter and 2009 results and provide a high level overview of our outlook for 2010. I have Bonnie Herron, our CFO, so later for questions and answers she can back stop me on the answers. I assume you all have a copy of the earnings release from this morning. I'm not going to repeat what's in the press release. At the end of the call we'll have time to take a few questions and answers. Our Form 10-K will be filed later today with the SEC and it will be available at our website at www.Intelsys.com or at www.SEC.gov.

The call is primarily intended for current and potential shareholders, but everyone, and I have to remind myself also, should be aware that in comments and questions, we typically see on our call logs employees, current and potential customers of either CoreCard or ChemFree, and also potential acquirers of those entities, and sometimes opposition lawyers for ongoing litigation situations. So in addition to these, we find other names that we have no idea why they're listening but I just want everyone to be aware in questions and in our comments that there's a wide variety of potential constituents on the call.

Before I start my remarks, I guess I have to dispense with the legalese, to remind you that the discussion today may and probably does contain forward-looking statements that relate to Intelligent Systems. All the statements, all the trend analysis and other information contained in this discussion, as well as statements including words such as anticipate, believe, plan, estimate, expect, likely, intend, think, and any of those other similar expressions, all constitute forward-looking statements. Prospective investors are cautioned any such forward-looking statements are not guarantees of performance and do involve risks and uncertainties. Actual results may and probably will materially differ from those contemplated. All forward-looking statements are based on information available to us as of today. I will give you my best judgment of things as I see them. That judgment might sometimes be wrong. But it's given for no purpose other than to let you know what I see from my vantage point, so take it that way rather than as a prediction or an absolute.

With that, talk about our financial summary results. We do have an improved balance sheet and liquidity and that really primarily reflects the effect of the oversubscribed rights offering that we had in July of 2009. We now have cash in the bank of about $2.8 million. We have no bank debt, and we have a shareholders equity of approximately $6.6 million, so we're on solid footing based on our current operations.

Our loss from continuing operations was almost 60% lower in 2009 versus 2008. The main reasons for that were simply a contingent profitability at ChemFree and we had a favorable mix of fluid and filter supplies versus machines, which gave us better overall margins. We also had more professional services and maintenance customers along with lower cost at CoreCard. We had across the Company expense reductions fairly dramatic implemented in 2008.

We did this in anticipation of a difficult 2009, and I will say as of the end of 2009, we pretty much reinstated all of the base pay back to pre-cut levels; however we have not given raises or increased anybody, so everybody is back to where they just were before they were cut about a year and a half ago. Of course we have a lot lower legal expenses. Well I said a little lower last year. We'll have a lot lower going forward, and that also plays into this and also last year, 2008, results included a $2.9 million gain on the sale of [Besair], which is in discontinued operations.

For the fourth quarter of 2009, we had a profit of $170,000 from continuing operations primarily to do with a very profitable quarter for ChemFree and more license revenue at CoreCard. As we'll talk about later, that license revenue varies all over the place for CoreCard based on how we're able to account for the software licenses. But let me talk about each of these for a couple minutes a little more specifically.

ChemFree overview. We were solidly profitable at Q4 and in 2009. We had a record profit of almost, and this is all pre-tax of course, of almost $1.5 million even with considerable legal expenses that went on through August of 2009. Q4 revenue in 2009 was about the same as Q4 revenue of 2008, and that's what we had planned, and actually think it's a very good performance, given the general economic weakness in the economy.

Revenue for 2009 as a whole was lower than 2008. 2008 had a spike due to the Cintas rollout and we never expected to continue at that level, so the revenue decrease was expected; however, we had a significant fluid and filter sales to the installed base. We were up 14% year to year for those two items, and those are the two items of which we have the most profit. The revenue in the second half of 2009 was stronger than the first half by also about 14, 15%.

We have a new fluid blending arrangement in the UK that reduces our shipping cost and also improves our price competitiveness in the EU. It will lower our top line sales, but will earn the same gross margin on each unit of fluid sold, and believe there's potential for increased volume as well since we're blending there, so keep in mind we expect to see some decrease in the top line revenue, as we're only receiving payment based on the actual sale of the concentrate there. Entering 2010 with a solid level of sales at both domestic and international markets, we do expect to see some uptick in sales for ChemFree for 2010 and definitely 2011 because our international markets are stronger, so we see an ongoing increase there.

As far as legal, as you guys know, we explained in the last call, it was held the week of July 13th in front of the federal judge. We had two rulings in ChemFree's favor, on the inventorship and infringement. There's still a few key issues for the judge to rule on, and frankly we have no idea why it's taking so long, and we have no idea when a decision will be made. We can't even guess as to what the outcome will be. It's just totally baffling to us and lawyers are absolutely terrified about going before a federal judge and asking him, "why have you not ruled"? So the lawyers simply say, you have no choice but to sit back quietly and let them do whatever they do, whenever they do it. It's a great mystery but we have no option other than wait it out.

We will have some legal expenses but they will not be large in this process. We do have an option of trying to push the attention of the case back up higher, but to do so, we would have to spend a fair amount of legal fees, and to do that, we would be basically making some new and additional charges that wouldn't affect directly the current case, but it might improve the visibility. It's something we consider, but we're not anxious to get back and spend a whole lot of money right now. So that's the ChemFree overview.

Our CoreCard overview, we had more revenue both from license and services in the fourth quarter of 2009 versus the fourth quarter of 2008. We had more license revenue that was recognized of completed contracts and our professional services, it's going to vary a lot by quarter. Your maintenance is predictable. It continues to increase, but Professional Services will go up and down. We do have deferred revenue of about $1.1 million for in process contracts and maintenance at CoreCard, that is as of the end of the Fourth Quarter.

The timing of the revenue recognition depends more on the customer than on CoreCard. Customers have a way of always taking much longer to go live than we anticipated, not due to anything we've done, but due to their own internal constraints so we have to wait for them. It's going to be a continued bumpy accounting for license revenue since it happens based on go live, and there's actually some other accounting things that we're looking at that may cause that to have to spread out even more. We may have to spread our complete license fee for our pre-paid sales contracts over the license of the contract, be that two years, three years or four years, so it's going to constantly be pretty hard to look at the numbers and actually understand what progress we're making, or whether we're having problems, so we'll try to give you that in another way or try to interpret the numbers for you.

If we look at our customers and prospects, we do have our first international customer has gone live, went live in the first quarter. It's Neil Post in the UK. We have a new retailer that signed on that's converting from a well known processor to our in house license software. We expect that go live to be at the end of March. We've signed our first processing customer. We've received our PCI compliance, so we'll be going live with our first processing customer in April. We also have our first reference customer for fleet card Management using the software in a big way. They've been working on it and have been live actually for a period of time, but they actually got a lot of fleets on it now and it's working very very well. We continue to enhance the product features and functionality of all of the products, including things like private label.

Our largest customer has always been Fingerhut Direct. They've renamed their parent corporation to Blue Stem Brands as they expect to put other products under the Blue Stem name so Fingerhut, well Blue Stem will be our customer, Fingerhut will be using it as well as other brands under Blue Stem. We have an excellent relationship with them. We're a very important part of their business and we continue to expand that relationship and it's because of our operations in India that allows us to give them a lot of value, more value than they can find in the US, so we continue to expand that.

Our prepaid card market continues to grow. We continue to get a lot more leads and inquiries on our fleet business. I expect to have to dedicate more resources to our fleet side, and that return won't happen probably until next year but we're going to go ahead and invest in that, so overall, a lot of customers, a lot of prospects, and we're still getting this without having any salespeople, marketing people. We're continuing to just very steadily take good care of the customers that we have and the good customers we add before we decide to go the explosive path in terms of exploding this. The key focus is just continuing to improve delivery of the services and determine the best way to increase productivity so then we can scale the business.

So as far as the rights offering, you recall that we said we were going to use those proceeds for CoreCard. We got more than we planned in terms of the offering. We have used some of the proceeds for a moderate increase in marketing, meaning we've redesigned our website, we've added some Public Relations. We've established our small business processing center, we've added more India resources, and expect to continue to add there, and we're going to, we may even have to add some additional outsourcing in India, and in the US, we have added some business analysts, and in that process, getting a little more management.

So I think that's my quick summary, just to give you a perspective of what happens here, this morning we had a two and a half hour webinar with a prospective customer for CoreCard in Texas, and it's a combination prepaid, payday loan, installment loan kind of new product that went very well. This afternoon at the conclusion of this call at 3, we'll have another two hour webinar with another potential customer that has already an existing relationship with us. We'll be doing some quoting for a couple of others actually this week, so activity is picking up, and when I say that, I don't want you to expect a bottom line, well either top or bottom line change in the near term, because of the way revenue recognition works, it takes a while, and also the way these customers install, it takes a while from the time you get a let's go to the time you really go.

So that's my quick summary on both ChemFree and CoreCard, and I think at this point, I'd turn it over for questions, to see of I can answer anything that maybe I haven't covered in the summary. So Operator, let's turn it over for questions.

(Operator Instructions). Your first question comes from the line of Sam Rebotski.

Hi, good afternoon, Leland.

Hi.

Well it's a nice quarter, there's some profits which is good, and I guess you have the cash that was raised and it appears that when you look at CoreCard, it has opened up relative to the pipeline. Are you getting more inquiries, or you got more of the ability to show your system and what it does, or is that something that is happening recently, or is that, could you sort of quantify where we are, compared to where we were at the end of the year and the same quarter last year?

Well, I would say there are more prospects now. I think the economy, I think people have adjusted to what the economy is and is going to be, so it's not that it's improving, but they've adjusted and they still realize that they need to do things with their platforms and with their business so we're seeing more inquiries, more interest, and I guess I would, it would probably be best, I see people poking their head out from the sand, saying maybe we ought to talk, along with a few that are saying we're ready to do something so it's definitely a little more lively than it was in the past.

And does it appear, price is always going to be important, but also the fact that you're comparing your system to somebody else's, and if it does what they want them to do, then price would not be as important although it's important but as long as it performs the way you might show them, you're more prone, price wouldn't be a problem?

I guess two comments on that. One, we're pretty inexpensive. I still look at it where we're early in our life cycle, and we're probably selling for less money than I would expect to sell this product for a year from now, so our price is not throwing anybody off, other than the fact that the option is outsourcing, and if you could outsource, you're going to pay a much much higher price but not this year. So it depends on whether you want to use the life cycle pricing to figure out what to do, or if you're more concerned about what I've got to pay this year and next year because with us you have an up front price.

This is why we're also going to get into the processing business. Again, you have to do that very slowly, very carefully. You can't afford to have any mistakes there because that simply permeates throughout the industry, they'll know you had a problem, you'll spend many many times more trying to recover revenues than you will if you take it very slow and always do it right. So that's kind of our process.

Well that sounds good. Now the ChemFree, I guess we just have to wait for the judge as the saying goes, here comes the judge hopefully.

Well we wish the judge was coming, but yeah, I think there should be another song, "Wait For the Judge".

Okay, okay, now the expansion seems to be greater going internationally, this is basically Europe or is it Asia oral parts of international expansion for the ChemFree?

It's actually all parts. We've got, we're doing a little bit in South America, doing a little bit in the Australia area, Asia and Europe, so we're working on all fronts.

So the people hear about you or you just get distributors or the process there?

You always use distributors for this because of the local markets and we have plenty of inquiries. You just have to find people who are really going to be able to move the product. Everybody wants to put it in their bag and say they are the ChemFree representative, but you have to slowly find folks who can really move it, and usually they want make it until they can find a customer who wants it.

And as far as the legal expenses, we don't expect to have, it all depends on what happens, but it will be significantly less than last year, and the only question would be whether you decide or not, what you decide with your legal opportunities et cetera, on how much you spend and I guess it's a judgment call as far as these opportunities going forward?

Yes, I'm going to be very hesitant to project legal expenses because I'm going to exaggerate here, but we could easily say less than another $1 million, now Bonnie is fainting as I say that but we could spend $1 million dollars in other infringement suits because people are infringing us everywhere so we aren't going to run and do that immediately. We've got a lot of experience now after this last lawsuit, so we will be very careful in deciding where there's enough opportunity to get a return from that and hopefully make a good judgment but I don't want people to go away under the conclusion that we won't spend $1 million dollars or that we will spend $100,000. We just don't know because we're not anticipating a lot of legal expenses but a lot of it will depend on if we get a ruling from this judge. We get the right ruling from the judge we're likely to spend a little bit more legal expenses because we'll have pretty strong grounds to be standing on.

Well hopefully as your business expands internationally, they may realize that they would have to sort of do something with you, do something besides the judge, that your product is for real and that it's time to settle and negotiate and save legal expenses and maybe sign a license or something.

Yes, so we just have to wait and see on that. We really are waiting on the judge to make those kind of decisions generally.

Good luck to you and Bonnie, and we'll talk to you in the future.

All right, thanks.

(Operator Instructions).

I guess we answered all of the questions. So let me just if there are no more questions let me just suggest that we'll have our Q1 very quickly, and we don't see any point than having another conference call in a month so our next conference call will be after the second quarter results rather than after the first quarter. So Operator, do we have any questions?

Yes, sir, you do have a question from the line of [Jim Schmidt].

Okay.

Good afternoon, Leland.

Hi.

I very much appreciate these conference calls we're going to have on a quarterly basis but I still struggle to try to in my own mind piece together by looking at let's say the july conference call and the one in November to see where we are relative to the two companies in terms of revenue and potential profits. In the case of the ChemFree, back in July, you had indicated this was a unit on a longer term basis that would be more likely to be sold, whereas in the case of the CoreCard, that's more of a strategic long term kind of an asset where the potential value can be significant. Now I remember, Warren Buffet and Charlie Munger, when they deliberated over Berkshire Hathaway in the beginning, and the thing always comes to mind, something of great potential where a lot of money gets invested, but the profits all seem to go to the value of the product and to the benefit of the customer, and not to the Company. Let's just take a look for those people that are on the call, and the potential that this Company has going forward, for all of the work that's being put into it for a stock that just sold around $1 and has a market value of about $9 million.

In the case of CoreCard, back in I think it was in the August call, the valuation was indicated, and I can understand how difficult that it is to put a value on something like that, but relative to 10 million on the low side and $30 million on the high side where there were some offers from outside parties, maybe private equity type of people from minority interest but the decision was made to go forward with the rights offering to the benefit of the shareholders, and in the case of ChemFree, it was worth at least something over $10 million. I'm not trying to hold one to whatever the values are but I try to on the basis of the few times that we get communication back from the Company struggle to try to put these things together.

It looks to me like based on the last call relative to the revenue levels that you expected at ChemFree, they were a little bit more. We had thought in terms of maybe the one Company, ChemFree, having revenues annualize maybe $10 million and CoreCard difficult as it is to try to project its revenues with the lumpiness it has something in the neighborhood on a GAAP basis of about $4 million so that's totaled about say $14 million and we came in I think at 12.8 I don't have the number right in front of me, but what I'm driving at here is, you mentioned that one-time in the case of CoreCard over the course of 17 years, maybe $30 million to $35 million invested in what appears to be a Research and Development task of considerable detail and difficulty over a long period of time trying to take COBOL, I'm not a programmer, I don't even understand this but trying to take cobalt and put it into a PC environment on the basis of other people doing it in low labor areas and so forth.

If there are people out there that see where you are and as far along as you are with the potential that you have, to what extent are there people still in a better economic climate now than last November, this private equity Company or whatever, that can see the profits maybe that you see to get the value closer to the 30 than the 10, to make the stock that's sitting at near $1 and never trades, worth considerably more. You've got your life, your reputation, all of the efforts that you're putting into this at stake, but everything on a discounted basis is at the present value today, particularly when you get to be in the 60s, right?

Yes, let me try to stop you for a second. You're trying to talk about what the stock price should be, and I hope you know that stock price is based on a lot of other things, and we don't have the control over that. All we can do is basically run the Company and the stock price does what it does when it does. Can we find private equity people? Yes, I can find somebody that can pardon my French here, who can screw the shareholders by putting money in CoreCard, it won't raise the stock price but they will benefit. They will benefit significantly in the future and I've chosen not to do that in terms of having the shareholders end up on the short end of the stick, so it's not a good plan in our opinion to take an investment in let's just say again, this is forward-looking, we're just talking here, it's not a good idea in my opinion to take an investment in CoreCard at a $20 million valuation and give a shareholder a participating preferred position, and letting him call the shots because at that point, it's his Company, it's not the shareholders Company and you're not likely to benefit.

No, I'm not interested participating preferred to common, that would be absolutely insane.

But you're going to get something like that in any investment, any kind of pipe or anything--

No, Leland, I'm familiar with the stock market. I've been in it for about--

I know, I know, so I'm just saying if we saw and if you have a specific suggestion as to how we could do that but we don't see that as being in the interest of the shareholder, and let me comment on the revenue. Our revenues were pretty much as we expected. The ChemFree made its numbers, CoreCard because of the way we do revenue recognition came in under its number.

Okay. Understood.

And it's going to continue to be just as I explained a while ago. We've been told by the auditors now, probably any contract we signed, even though it's for a license, we're not going to be able to count that even when they go live. We're going to spread that over a longer period of time so we will have this deferred revenue coming in so there will be, the stock market doesn't understand that. People don't understand that. They just look at the revenue and look at the earnings and say Oh, 10 X or whatever kind of multiple you get.

Yeah, I don't think you have to worry about the stock market. I'm out there as a shareholder and there's other people out there as shareholders but there's not much interest among the big investors in Intelligent Systems.

And a couple other things. We didn't actually convert COBOL to it. We simply took the COBOL system that was there and used that as our guide to rewrite software using a more modern language but today, no one would, if we were trying to license a COBOL code, we could never sell it.

No, I understand that. But I think to go back right to the beginning when you were answering my question, you see some future out there and some point in time where you can get the kind of value that you think and shareholders deserve on CoreCard. And that, you're not talking 10 years. You're talking three to five I guess.

Yes, I'm too old to be talking 10.

Yes.

You saw my investment in the rights offering.

Yes, sir, yes I did and I appreciate that very much.

And that's not just sort of loose change laying around. That's significant for me.

Well there's very few clues like that that dribble out to somebody who tries to do analysis like myself that give us more than just the degree of hope. I mean, you put your money on the line that's a significant positive to any shareholder.

Of course, I might be stupid, no I'm kidding. Based on what I see--

Well people make mistakes. God knows that.

But I'm not in love with this thing. I want to make money at it.

Yes.

And I don't need the job, so that's my honest assessment that it has a very, I've got to be careful here, this is a conference call. It's my honest assessment it has a good future.

Okay, thank you, sir, thank you for taking the time to talk about it.

All right, thank you. Any other questions?

You have a follow-up question from the line of Sam Rebotski.

Yes, Leland, I want to give you 100% vote on what you've been doing and the direction you're taking. The opportunity which we have to look at, we have to see the ChemFree lawsuit settle so you could sort of quantify what the value of ChemFree is going forward, with that established, you'd be in a much better situation, and with the economy sort of turning around, as you're seeing more opportunities with the CoreCard and as you direct you also sort of get a better valuation and clearly, with the time, the market might look at this a little differently and sort of trade the stock at a higher valuation, and they would look at the numbers more and you'd better understand so I guess these things just have to settle out, and I guess the waiting should resolve these issues.

Yes, I mean, we're all impatient for it and believe me, I'd like for it to happened to but I also want to make sure it happens rather than take a chance that we do things that might speed it up, that could blow it up, so I am for preservation right now, and growing as opposed to taking the chance of blowing it up, and that could be a mistake, but I'll just tell everyone that is our strategy, is to make sure we don't do anything that blows it up as opposed to builds it up.

Well, I go with your judgment, Leland.

All right, thank you.

Okay.

Any other questions, Operator?

There are no further questions.

Well again, thank you everyone. Thank you for your comments. I can understand some frustrations and I'm sure you can understand mine, because I have some too, but I think we're, I'm very happy with what we're doing and how it's going. Sure I wish it was faster and we were doing more, but we're going to continue to take care of some very good customers that we have and I think you'll find it will pay off handsomely over time so thank you very much and we'll talk to you on our next call.

Thank you for your participation in today's Conference Call. You may now disconnect.