CoreCard Corp (CCRD) 2011 Q2 法說會逐字稿

Good morning. My name is Joanne, and I will be your conference operator today. At this time I would like to welcome everyone to the second-quarter shareholder 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, welcome to the Intelligent Systems investor conference call. I expect the call to probably last less than 30 minutes. And during that time, I'll give you a brief review of the results of our second quarter and year-to-date periods for 2011, and also update you on the progress, strategy, and outlook for ChemFree and CoreCard Software, our 2 main operating companies.

I have to say that there's not a whole lot that has been changed from the last call, but we'll go through that anyway. I assume that you have a copy of the second-quarter earnings release. I'm not going to repeat all that information and the things that are in the Press Release.

At the end of the call, we will have some time for questions and answers, and of course, the Form 10-Q for the quarter ending June 30 was filed yesterday with the SEC, and it's available on our website also, either at Intelsys.com or you can find it at SEC.gov for more details.

Before I start, I have to dispense with the legalese and remind you that this discussion today may and probably will contain forward-looking statements relating to Intelligent Systems and its subsidiaries. All the statements, analysis, other information contained in the discussion, as well as statements that I may say where I anticipate, I believe, plan, estimate, expect, likely, intend, and all similar expressions will constitute forward-looking statements.

Prospective investors are cautioned that those statements are not guarantees of future performance and involve risk and uncertainties and actual results may and probably will differ from those [stipulated] by those statements. All of the statements are based upon the information that I have as of today, and I'll give you my best judgment of things as I see them and that judgment might sometimes be wrong. But it's given for no other purpose than to let you know what I personally think so that you can take that not as a prediction or an absolute, but just my thoughts.

With that out of the way, from a financial results summary, we did report a profit of $637,000 in the second quarter of 2011 and a profit of $283,000 for the 6-month period also in 2011. Now, I'm not jumping up and down because we have a profit, because you know I've said many times before, we're going to be lumpy; different things are going to contribute to that, so it's not necessarily a trend, just because you have a profit here.

The contributing factors to that profit for this particular quarter was a $450,000, 1-time income related to payments by a former law firm that represented the defendants in ChemFree's patent suit. It followed court-imposed sanctions against the law firm for frivolous defenses. ChemFree was paid $450,000 to reimburse for related legal expenses. While this is related to the ChemFree patent suit, it is not a final income in that matter, and I'll talk about that later. So that $450,000 was a settlement; it was not court-ordered in terms of litigation. It was a settlement between ChemFree and the defendant's law firm for frivolous defenses.

On the balance sheet side -- actually, another contributing factor to the profit there is continued strong profitability at ChemFree also. So those 2 things are the primary contributors of the profit that we reported in the second quarter. On the balance sheet side, as of June 30, we did have cash of $3.2 million. We have no bank debt. We have shareholders equity of $6.8 million.

In the second quarter we renewed our $1.25 million bank line of credit. We haven't used it in the past 2 years, and we presently don't anticipate any borrowings for the foreseeable future, given our cash position and our net, near-term outlook for the use of cash. Deferred revenue of almost $2 million is also on the balance sheet, most of which will be recognized in the next 6 to 9 months. That's the summary.

Now let me go to the ChemFree overview. Profitability in 2011 continues the trends that began in 2009 and went through 2010. In our last conference call, I said that looking forward into 2011, we expected some price inflation in materials. That's because we use a lot of plastics, as well as an inflation in freight cost. We maybe have offset part of that by price increases.

I also said that we're not likely to grow at the same rate in 2011 as in 2010 but that we would have a consistent profitable business. So far this year is unfolding in line with our expectations. Profits are up significantly in both quarter and year-to-date, marginal price inflation of raw materials we've seen, but we've been able to counter those to a large extent by reducing production costs rather than raising our prices.

We see continued growth in revenue at the international markets and for worldwide [putting cultures], what we call consumable supplies. But we think we'll see lower-than-expected revenue in the domestic US market for machine sales. The rebound in machine sales that we saw last year, as the economic recovery took hold, has stalled somewhat in the US. We do have some new initiatives to spur domestic sales, but it's I think too early to tell how successful they will be.

Our high-margin of fluid and filters to install base in new customers is up year-to-year, as you would expect it to be. And likewise, as expected, not seeing the same domestic revenue growth as the prior year, but strong consistent profitability, stay in line with our expectations.

So in summary there, I would say we are somewhat cautious about ChemFree growth. We could have some little shortages in certain months. But by and large, we see consistent revenue and profits in ChemFree and certainly don't see any big change on the upside nor the downside.

Legal update for ChemFree, we had the trial in July 2009. In June of 2010, the judge issued a preliminary findings and conclusions that had two rulings in ChemFree's favor, but the third issue, he found 4 US patents were found to be invalid based on obviousness. In November, before the judge issued his final ruling, the judge retired -- I use that word in quotes -- after being charged by the FBI with criminal charges. There was a new judge assigned, and in June 2011, he issued his findings that upheld completely the ruling of the first judge. As a part of that, they awarded certain, what's called, taxable court costs to be paid by ChemFree to J. Walter, which was the defendant.

Next steps in the legal scenario -- in early July, just a month ago, we filed an appeal of the rulings to the Federal Appeals Court. This will be heard before a three-judge panel in Washington, DC. It's likely to take 9 to 12 months before a final ruling in the case. We will incur a modest amount of new legal fees, but otherwise no immediate impact. We compete in the marketplace on factors other than patents anyway, and our patents do expire in 2014.

Presently, we believe that we have a high probability of prevailing in the appeal, although there are no guarantees how the panel will ultimately rule. We have 3 judges that will sort through this. Whoever loses the case will likely have to pay certain taxable court costs to the winning party. This is not legal fees, but things like filing and copying costs.

So I think summary, the big part of the legal case is over. It'll be a much lower profile process as far as the appeal, and we'll just have to wait and see what happens there. In the meantime, as I said, we really don't compete primarily based on patents. We compete on other things, although the patents we certainly felt were important; and it would've kept some other people out of the marketplace if we had won in the first round.

So moving on to CoreCard, in the second quarter of 2011, CoreCard Software license revenue and professional services revenue were not quite as high as last year due to differences in the value of the contracts. The price depends on the software product license, how many accounts were covered by the initial license, and also the amount of customization that's requested by the customers, which is based on their current business requirements.

So we may sell the same number of licenses, but the revenue can be significantly different depending on the number of accounts that are involved since practically everything we do at CoreCard is priced based on the number of accounts that our software be will be used for. The good part of that, it means that as customers grow, they pay us more as they add accounts to the system.

Our maintenance revenue is pretty predictable. It's recurring and it did increase in the quarter and for year-to-date periods of 2011 compared to the prior year. We do expect to have an uptick in revenue in Q3 based on a significant new contract that will go live. This is a contract that was sold over a year ago, but as they go live, we'll recognize the revenue. As with most of our install base, we generate additional revenue from post-implementation services and support for a number of years.

Now, as to strategy and focus -- it's taken us at least a year longer than planned to be in a position to become a prepaid card processor. As you know from all the talk about financial regulations, banks and their regulators have become very wary about approving new prepaid card programs that use the bank's identification number, commonly called the BIN, to issue prepaid cards.

In 2011, we are working, I'd say intently and intensely, with a federal national bank to establish our prepaid processing operations and to obtain the necessary and numerous certifications that are required. We do expect to be processing some of the bank's current prepaid card programs in the fourth quarter this year. That's not a revenue benefit. In fact, it's fairly costly to get in this business and to begin doing that, but it is a strategic benefit to finally be in position to be the processor for a federal bank.

It's a long-term initiative. It won't contribute revenue, and it probably will increase expenses in 2011, as we put in place the necessary process and infrastructure. I'm going to say, we are about there. We've gotten all of the approvals necessary. It's just now a matter of adopting our software and interfacing with certain of the external interfaces we need to do to begin this processing. We'll continue to license our software for customers who wish to run it in-house, but our processing services will now be another option, particularly for small programs who prefer to outsource the processing of their prepaid programs.

CoreCard's product development marketing strategy has been to provide robust, transaction processing engines with versions of product features and functionality that can address a large number of markets and card types. This has been expensive, as we did this for a large number of markets. It's a multi-year strategy, and as I've said before, we certainly could be criticized for not focusing on just 1 market, rather than trying to address multiple markets at the same time.

However, at this point we now product variations and customers for several different types of card programs. We do private label cards with some very large customers. 1 of those is a company called Bluestem Brands. And as you know, I very seldom identify customers, as most of them don't like to talk about who does their back-office processing.

However, Bluestem Brands has a registration at the SEC for a public offering, and therefore they have identified CoreCard in that offering prospectus as the provider of significant card services. As a matter of fact, they had to identify CoreCard as a risk factor, because we are clearly a risk factor. If we go down, if our software causes problems, the Company has significant problems, so we're very critical to their business. So that's the private label cards.

We also do all types of accounts receivable and short-term loans. We have a payday loan processors. We have other loan customers that are somewhat hybrids between payday and standard accounts receivable. Again, don't want to identify those customers at this point, although several are backed by significant national venture capital companies.

Plus, we have prepaid cards. We have identified a couple of our prepaid customers. These are folks who license our prepaid platform who offer prepaid processing services to other customers. And we also have fleet cards. We have 2 major fleet card providers who are using our software to provide at least a portion of their accounts receivable to fleet cards. So that's a pretty broad platform.

We have to continue to deal with each of these as we expand. We also will continue to focus on improving delivery of services and trying to find the best way to increase productivity and scale our business. Clearly scaling is very important now that we have a toehold in each of these segments.

We're placing a lot of emphasis on growing and trending our development testing teams, particularly at our India operation where we have over 200 employees in Bhopal, India. We are adding more employees there. We're investing money in test automation. We really want to be the best that you could be in terms of this type of accounts receivable. I'll call it complex receivable, back office.

The regulatory and banking environment will continue to provide challenges for our customers as well as ourselves. We believe that we've shown the ability and that we are positioned to adjust to these new changes and business requirements as they do impact the financial services markets. We expect to continue to cautiously invest the resources to build a solid, long-term business.

That's pretty much the summary of where we are right now. I think at this point, let's see if there are any questions, and I'll see if I have any answers to what you might have for me. So, operator, open it up for any questions.

(Operator Instructions)

Good. Maybe I answered all the questions and we don't have any. That's fine with me.

There are no questions at this time.

All right. I said we'd be less than 30 minutes, and we're much less than 30 minutes. If there are no questions, let me remind you that we usually only do this twice a year, unless there's significant new developments to report, which we'll schedule one in between if we see anything very different.

By and large, we keep just doing the same thing, trying to continue to expand in these markets, trying to make sure that we're solid and that we have a good future as we bring the folks and continue to move into markets. Thank you for your attention. I thank you for your support and if you have any questions that we're able to answer off line, feel free to call either myself or Bonnie here in the CFO and will be glad to answer them for you. Thanks, everyone, for your time today.

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