CoreCard Corp (CCRD) 2010 Q2 法說會逐字稿

Good morning. My name is Molly and I will be your conference operator today. At this time, I would like to welcome everyone to the shareholders second-quarter 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.

I would now like to turn the call over to Leland Strange, President and CEO of Intelligent Systems. You may begin your conference.

Thank you. Good morning, everyone, and welcome to the Intelligent Systems investor conference call. I'm going to assume that most of you that are on the line today were probably our last conference call in April of this year and I will take up from there on many of my themes. If I'm wrong, you can ask questions later.

As I did then during the few minutes or so, today I'm going to plan to focus on our ChemFree and CoreCard software operating companies, since they are the primary drivers of revenue and profits. We'll update you on the progress since the last call. We'll briefly review the results for the second quarter and year-to-date that ended June 30, and also I will provide a high-level overview of our outlook for the balance of 2010.

I'm going to assume that you have a copy of the earnings release from this morning and I am not going to repeat all the information in the press release. At the end of the call, we will have some time for a few questions and answers. Of course, our Form 10-Q will be filed soon, probably tomorrow with the SEC, and it will be available on our website at intelsys.com, or at www.SEC.gov.

Before I start with the remarks, let's get through the forward-looking statement legalese and remind you that this discussion probably will contain forward-looking statements that relate to Intelligent Systems. All of those statements, trend analysis and other information that may take place in this discussion as well as statements including words such as anticipate or believe, plan, estimate, expect, likely, intend, etc., etc., all of those constitute forward-looking statements.

Prospective investors or those who are going to buy or sell are cautioned that any such forward-looking statements are not guarantees of any future performance and we do involve risks and uncertainties and that actual results will differ from those that may come out in those forward-looking statements. All of them are based upon information available to us as of today.

I am going to give you my best judgment of things as I see them and that judgment might sometimes be wrong and has been sometimes in the past, but it's given for no other purpose than to let you know what I personally think, so take it that way rather than as a prediction or an absolute.

Now that we've got rid of that, so that the legal folks are happy, we can say that from a financial results summary, as you probably read, we reported profits in both the second quarter and the year-to-date periods of 2010 compared to losses in the same period last year. The main reasons for that are two -- continued strong profitability at ChemFree based on good revenue, revenue growth as well as lower G&A expenses, and in particular legal expenses. Second, we had e improved financial performance at CoreCard, period-to-period increases in software licenses, professional services, and maintenance customers at CoreCard.

The balance sheet side at June 30, we have cash of $2.4 million. We have no bank debt and we have shareholders equity of approximately $7 million, which is up from December of 2009 due to the Company's profitability during the first six months of 2010.

We did renew our bank line of credit in June on essentially the same terms and conditions as before. However, presently we don't anticipate any borrowings on the line for the foreseeable future given our cash position and our near-term outlook. But it is comforting particularly to our CFO that we have a bank line in place.

Talk about ChemFree for a second. It's solidly profitable in Q2. Year-to-date 2010 continues positive trends of 2009. We had a record profit of over $1 million in the first six months of the year. Now realize that last year and the year before we were also doing very well but because of our legal expenses, the overall P&L did not show as well. There were substantial.

On our last conference call, we indicated that ChemFree was going into 2010 with a solid level of sales both domestic and in the international market. We expected to see some uptick in sales particularly in the international market. I can say that through June and probably through now, ChemFree is actually slightly ahead of its 2010 plan.

Second-quarter revenue at ChemFree was up approximately 26% compared to the same period in 2009 and year-to-date sales are a little over 20% ahead of last year. Revenue growth has been strong in both the domestic and the international markets. We have significant fluid filters being sold to the installed base and to new customers. It's clearly up year-to-year especially in Europe, which had low sales last year during a transition to a new fluid blending site.

ChemFree revenue in the second quarter 2010 was approximately 3% greater than in the first quarter 2010, so quarter-to-quarter, we have some increase. Despite the revenue growth, total expenses at ChemFree were lower, but that's mainly due to lower legal expenses.

Legal is obviously a big issue at ChemFree and I want to mention it, but since it continues to be ongoing, I want to be careful in my remarks and won't speculate really on the outcome. We did have a trial in July of 2009 before a judge. In June 2010, approximately 11 months after the trial concluded, the judge issued his findings and conclusions. Had two rulings in ChemFree's favor, inventors were correctly named, J. Walter (inaudible).

But the third issue, which was based on obviousness, four US patents were found to be invalid on the basis of obviousness. And the obviousness ruling comes from a Supreme Court ruling 2007 that significantly changed the standards for obviousness. That was four years -- that ruling came down four years after ChemFree originally filed our suit. So the legal landscape has changed since we filed the suit. Obviousness is much easier to claim than it was prior to the Supreme Court ruling.

I will tell you that we disagree and we don't think it's obvious and in July, we filed two motions for reconsideration by the judge. Now obviously, judges don't like to change their reasonable opinion, so he will decide whether he's going to reconsider or not. We don't know how long that will take. If he doesn't agree to reconsider, he will issue a final order for judgment. That's likely to take us several months.

I can tell you his final order or judgment does not cost us any money, it simply precludes us from getting money from the other party and stopping them from doing what we believe infringes on our patent. When the final ruling is placed, if it's not in our favor, we are likely to appeal. I would say likewise if the ruling is in the other party's favor, they are likely to appeal. So we are not through with legal expenses, but the legal expenses going forward will be nothing like those we have had in past to get to this point.

So I guess in summarizing the impact of ChemFree, there is no immediate impact. We have to compete in the marketplace on factors other than patents. We've been doing that all along anyway. I think it's fair to say it may make it easier for others to compete. But our patents expire in 2014 anyway, so it's not like there's a really long term period in which we have free reign. But there's no financial impact.

All the expenses are recorded in prior periods. There may be some additional legal expenses in the second half of 2010. Well, there will be some. The question is how much, but in any even ChemFree will remain very profitable for this period. So we are really happy with how they are doing and with the way the business is going.

Let me move to the CoreCard overview, the second major subsidiary that we have, the revenue from licenses and services are up significantly in the second quarter and also year-to-date compared to 2009. CoreCard is essentially on plan with the year to date. We have four license revenue recognized of completed contracts during this period, one significant new contract, which was our first conversion customer off of a national processor, was recognized in Q2. And our first international customer, the license was recognized in Q1.

I can say we do not expect the same year-over-year license growth in the second half of 2010. It doesn't mean that we don't have more business because in fact we do have more business. We have all we can handle for the second half. However, we will not be recognizing license revenue I don't expect in the same way.

Clearly license revenue is going to continue to be bumpy based on when new contracts go live as long as CoreCard is roughly the size it is, it's going to show up. If it was five times as big, then you can smooth that out but you can't smooth it out at our current size.

In addition to license revenue, our professional service, which does vary by quarter, it was significantly higher than earlier due to more customer projects. Maintenance is predictable and is increasing, so that's also a very good sign.

From a customer prospect look, our first processing customer in production mode -- that means we're doing the processor for them -- started in Q3. We do have a PCI-compliant data center and a disaster recovery site. We are not pushing hard for processing customers at this point because we have so much we're doing in the licensing area, but we will be in the processing business in a light way. I guess I would call us a processor-light.

And one of the main reasons is so we will be able to understand exactly what our customers go through using our software. We want to eat our own cooking and that means we would install any new upgrades in our system first to make sure that not only did the testing work out but make sure in production where if we are delivering a good product, then we would deliver it to our other production customer.

We just signed in the past couple weeks a new customer for fleet card management. It's likely to be a significant contract over the next few years. I expect it to be in the $1 million range within the next six months based on license, maintenance, professional services, sort of all in. It could grow fairly quickly after that or that could be all we do for a while depending on how well our software performs in their particular environment for their particular customers. So it's a contract that's a good contract for us. It's similar to others, so it's not necessarily a huge contract, but it could be a very big contract if our software performs well and they migrate a lot of their legacy business onto our system.

I might just note there just for those of you that don't remember, we license our software based on the number of account that people have live and are using. So initially our contract will be for a certain number of accounts if they add cards and add account over time, we continue to get additional new license revenue as well as new maintenance revenue without really doing any more work. The only way you can make the CoreCard model work is to -- given the expense that we have expended over time and investment we've made -- is to have people pay based on the number of accounts that they use the software with.

We do have other new private label customers in our 2010 pipeline. I expect to sign another fairly good one shortly. You may wonder why I'm not naming customers. Our typical mode is not to talk about customer names (inaudible) some customer has previously agreed to that. And if it becomes known throughout the industry for some reason, we will mention the customer, but often -- most of the time our customers use our software as their account of record, but their customers do not believe -- their customers believe they are using that company's software. They don't believe they have gone to a third party to get the software.

If they knew that they had gone to a third party, that customer may come direct to us. So we are trying to -- we do want to protect our customers while we want to grow. We are going to be loyal to our customers, so that's why we are not naming them.

I can say the fleet card license was with a public company. Now a lot of our clients are with large, very respectable companies, which tells you a lot about what we have at this point in time.

We do continue to enhance our product features both in private label, prepaid, as well as fleet cards. In this case, we're adding revolving credit which we of course do very well, but we're adding that to the fleet card product for this particular license.

Our key focus for CoreCard is to approve delivery of services and determine the best way to increase productivity and scalability of business.

We have a big emphasis on growing and training at our India operations. We've added about 20% more employees in 2010. It's -- we still don't have salespeople at CoreCard because we have a limited ability to add new customers based on the time and effort it requires on the technical resource side. So that's where our challenge is is to figure out how to scale more. But overall, we are happy with where we are there.

With the help of other issues outside of CoreCard and ChemFree, you will recall that we had a -- we have a note due from IBS, which is a company that we sold the VISaer business to. The note is -- was due June 15 for $500,000. They owe a total of $1.5 million over three years. IBS objected, did not pay it, objected, claimed there was some misrepresentation in the sales document. It was a breach of representation in warranty and the Asset Purchase Agreement, so they did not pay it. We replied.

We dispute the allegations. We have sent them notice of their -- regarding their failure to pay. We expect this to go to arbitration if we're not able to resolve this directly. I feel we will ultimately prevail, but frankly there's going to be some time and expense involved and there may be some compromise on the number. But we are not -- well, obviously these cases it's hard to know, but that's just the status of it.

So another comment about SOX 404. The Dodd-Frank financial reform bill gave us a permanent exclusion for the requirement to have auditor report in internal controls. That is going to save us money and time but still management will report on the internal controls in the 10-K. So we will do the same thing we would have done otherwise. We simply won't have to pay the auditor to go over it.

I guess at this point I will open it up for questions. Hopefully I've given you a good overview, but maybe I've missed some things that you would like to ask questions on.

So, operator, let's open it up for questions.

(Operator Instructions).

While I am doing that, I would just obviously comment, our stock has nothing to do with the stock market clearly with this big bust yesterday. I don't think we did anything, but likewise, if it had gone up the same amount, we probably still would not have done anything.

There are no questions at this time.

Okay, well, I want to thank you for joining us and as always if there's any way we can help you get a better understanding, please feel free to call us. Our next call will not be till 2011 after our fourth quarter and 2010 results announced.

So with that, let me again say thank you and thank you for the interest in the Company and we will close the meeting. Thanks.

Thank you. This does conclude today's conference call. You may now disconnect.