CoreCard Corp (CCRD) 2017 Q2 法說會逐字稿

Good morning. My name is Theresa, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter earnings release conference call. (Operator Instructions) Thank you. Mr. Leland Strange, CEO, you may begin your conference.

Okay. Good morning, and welcome to the Intelligent Systems investor conference call. I actually asked the operator to hold on for a few minutes this morning because normally we start with a lot of boiler plate, but today, I want to do things a little different, and we had several people calling in right at 11:00, so I apologize for being a few minutes late, but there was a purpose of doing that. Just to say, I'm going to start the call a little different by telling and discussing on the front end of the call what I personally would like to know from management as a shareholder that I did not see specifically or read in the press release. In other words, a little color to the black and white numbers in commentary that you will find in the press release and in the 10-Q that, of course, we'll file later today.

You know if you've been following the company for a while that our operations at this time consist almost totally of our wholly-owned subsidiary, CoreCard. CoreCard is the primary business of Intelligent Systems at this point in time. Organizationally, we keep the Intelligent Systems parent separate and run CoreCard as a separate company. And while that is technically an accurate statement, the Intelligent Systems staff, including myself, devote much of their time to CoreCard operations. You might ask, "Well, what else would you do?" Well, there is the little administrative task of keeping the company a public entity, so you have the audit, the SEC reporting, shareholder communications, these things that you could just categorize as a public company expense as well as community and industry relations and looking for other opportunities that are aligned with our FinTech focus. And just an example as part of that, I was in San Francisco this past Thursday talking to a company that kind of fits in with what we're trying to do. So that corporate entity, Intelligent Systems, is purely an expense with the exception of when we sell all or part of a company in which we own shares. And of course, that's no longer a regular occurrence as we have limited ownership in other companies. We sold the larger company and raised all the cash when we sold ChemFree about 2.5 years ago.

I will be happy to answer any questions about this or any other part of our discussion at the end of the call. I do have our CFO, Karen Reynolds, with me to answer specific financial questions. And I said earlier that the 10-Q would be filed today. So if you want to deep dive on any specifics or you're not really familiar with the company, you really should read carefully the MD&A and the risk section.

So what else would I like to know in summary quickly from management as a shareholder? Well, I guess, it's: "How's business?" And I would answer, "Business is good." I would even say, it's very good. And I guess I have to qualify that and say, I'm talking about customer activity, but how that translates into short-term revenue or for the bottom line often doesn't correlate on a year-to-year basis. And those of you that understand the company will also know why that's happening because we discuss it often.

I guess, at this point, when I'm expressing an opinion about the business, I better invoke the SEC, forward-looking statements qualifier, and say that I am using words and expressing an opinion that's my best judgment of things as I see them, and that judgment might prove to be wrong. I'm conveying my expectations based on what I know and what I believe at this time, and I'm not making firm predictions about future events. These things are categorized as forward-looking statements and are certainly not guarantees of future performance and, of course, do involve risks and uncertainties.

So I just said that business is good or I said it's very good. And partially what I mean by that is that all of our resources are in heavy demand by existing and/or potential customers. Internally, we wonder if we can get it all done with the resources we have and hiring new ones requires a long planning period to become proficient in transaction processing software. We have approximately 265 employees in our India office. We have one large [licensed] customer that wished we had twice that many, so we could help them get more of their customers on the system quickly. It's difficult because they have customers in all parts of the world, including China and everyone needs some variation of the software. It's not cookie cutter or out-of-the-box software, it's complex. They're willing to pay for the changes, but we're simply limited by the resources as far as what we can do for them. And of course, the pull is not only what we can do for them, but we have other customers and we have other potential customers, so our managers are always fighting for resources.

And I guess, it's a good time to mention one of our strategic challenges: that we run out and hire many more people knowing that the training cost will push CoreCard into a P&L loss, or do we push to make a profit? We've generally kind of walked that fence, a little on one side and a little on the other. We didn't throw it all in. As a large shareholder myself, I certainly wanted to be conservative, but we also didn't push to make as big a profit as we can make. So we kind of walked the balance bar.

One of our newer and main competitors on the West Coast has raised, I think, about $76 million. They have been in business for about 5 years, just really started generating revenue a few years ago. So with $76 million invested, they are hiring as fast as they can and they are competing with us. They are private, they are clearly losing money, but their revenues are growing and eventually they're likely to be very profitable because those profits will follow those revenues in the future. The kind of customers we get, once we get them, they're going to stay on with us for a good while because it's hard to change. Of course, that competitor, they may be acquired well before they get to profitability, which is probably their goal. So strategically, we have to ask the question, "Do we adopt that policy to compete, or do we continue to push for some profitability or very limited loss?" I give you this challenge to let you know we're seriously debating which way to go. And remember, I said business is good.

So if we go that way or if we stay with what we're doing either one, how do we eventually become profitable? Well, we have to scale the other side of the business, which is processing. The customer I mentioned is a [licensing] customer. We still generate really good revenue, in fact, they're our largest customer at this point due to the professional services we provide them, not due to the licensing revenue they are paying us. So to be clear, we are scaling the processing side of the business and we will be ramping that up.

The competitor I mentioned is strictly in the processing side of the business. So they have a 100-plus employees only devoted to the processing of prepaid. We clearly have work to do to make it easier to board new customers as we scale up, and we are making good progress. For both sides of the business, I believe, our significant advantage is the breadth and depth of the product line. Credit should eventually be of our bread and butter, although we'll ride the prepaid wave as long as it exists. Again, the competitor I mentioned is primarily in the prepaid space. So that's the ongoing quick upfront elevator pitch business summary.

Now how about the affiliated FinTech investments that we've made? Well, we've had winners and we've had losers the past 3 years and that's generally what's expected. One of our small customers that we invested $100,000 in, and I'm going to use that number and it's always approximately, so I'm going to say $100,000, we've actually written most of that off, I believe, in this particular quarter. Right, Karen?

Correct.

Okay, so this quarter. On the other hand, that customer has paid us a good bit of money, probably close to $300,000 in fees for professional services and for licenses. So although we may eventually write off a $100,000, so far we've gotten $300,000, and we'll get more over time as they grow. So sometimes the investments are for purposes other than what it appears to be. Now we could have gotten lucky, but they raised more money, and we got diluted pretty much to nothing, and we decided not to continue with that investment. So that's an example.

It's well known that we're one of the earliest Kabbage investors. And I get asked all the time about- what's that worth? Well, it was a small investment, and you can tell from our balance sheet that it was well under a $0.25 million. We are often asked what's the investment worth since the press says that Kabbage is raising money at $1 billion plus valuation, so we must have made a ton. Well, I've always said, "I don't know." And seriously, I had no idea because of preferences that are generally attached to successive preferred financing, and we don't see or have knowledge of those attachments and what the deal terms are. We really had no idea of dilution. So I was not in a position to say, "Well, it's worth what we put in it or it's worth 20x what we put in it or it's worth nothing." We disclosed what we knew.

Well recently, in a publicly announced investment by SoftBank in Kabbage, and I think it was around $0.25 million, and the press says it was at an over $1 billion valuation. We have learned that SoftBank, as part of that, will be willing to purchase some shares from the earliest investors. And since they're going to purchase some shares, we'll now have the ability to have some idea of what our investment's worth. We now believe that the Kabbage investment on our books is worth somewhere between $1 million and $2 million, probably somewhere in the middle. We'll be offering some of our shares in some type of tender offer at that kind of value, but we really have no idea at this point how many we can actually sell. So just to be clear, Kabbage is currently, and I may emphasize currently because that could change, is currently valued at between $1 million and $2 million and it's on our books for definitely less than $0.25 million. So it's a good investment, but really we didn't make it for that purpose. We made it to help us work with Kabbage as a customer and they are a very good customer. They're a processing customer, doing very complex credit-type work all around the world. So we're processing for them in the U.K., in France, in Spain as well as the U.S., and they continue to grow. And I guess, I would say, given the size of the investment they've got, I'm pretty comfortable that the number that I said will continue to be a good value for us in the $1 million to $2 million range. Although if given the opportunity, we'll probably cash out a large portion of our investment because that's not our primary business. So hopefully, that is [used], that would be good news. And that, for me, it has nothing to do with stock price. I wouldn't know whether to run out and buy stock or sell stock based on that. It's a very insignificant number in the overall value of CoreCard. The more significant number for [a] Kabbage [in the] evaluation of CoreCard is that they are a licensing customer paying us fairly for very complex business and they'll be doing that for years and that's worth a lot more than what we make it on the investment. That's why I don't consider it some type of a market-moving event.

That's my quick summary of the business upfront. If I talk about a little bit on the strategic initiatives, I've often said and I'll repeat again, that we are open to anything that would benefit the company. We continue to remain open and are still considering various alternatives. That could be: we could sell the company, that's what shareholders do if they can make a lot of money, if the price is right; we could merge with someone else; we could merge with another process or we could merge with one of our customers; we could merge with a bank. There is all kinds of things that we could do that, I believe, could be an advantage to our shareholders. We could acquire something. We could use some of our cash to acquire one or more companies that are complementary, or we can invest in some other things such as the Kabbage, and we've done some of those recently that helps us acquire other business. So we don't have any specific transactions with near-term potential that we're working on, other than maybe a couple of investments. And it's an area we're going to continue to have conversations and continue to be open for anything that makes sense for our shareholders of which I personally am a large one and would be happy to see a really great exit event. So that's my -- that's the different type of approach I wanted to take to the first part of the conference call before we talk a little bit of what's normally happens in these type of calls and that's simply a review of what we've just reported.

On a liquidity standpoint, our cash has decreased from $17.7 million at the end of '16 to $15.9 million as of the end of June. On December 30, 2016, we signed an agreement to invest $1 million in a privately held technology company and program manager. This is in alignment with what I talked about earlier about our CoreCard operations, where we might do that. We funded that in January of 2017. So the decrease of about $1.8 million -- yes, that $1 million was due to that investment.

In addition, we invested a little less than $100,000 in capital equipment. And by the way, we'll continue to be investing in capital equipment as we grow our processing operation. And we did use in the past 6 months about $700,000 for operations support as well as corporate and other public company expenses. So we didn't really use a whole lot of cash for ongoing operations.

You will find in the press release that our revenue from both software license and services, which includes maintenance, processing and professional services, grew 100% in the second quarter of 2017, 53% for the 6-month period of 2017 compared to the same periods in 2016. Now I always just discount that because revenue recognition, when we're this small, continues to distort those numbers in terms of real meaning for a shareholder. It's really too early to speculate if we'll experience that same year-over-year revenue growth for the remainder of 2017, and particularly because of the reasons I just mentioned, which is when we get new contracts with revenue recognition that's often unpredictable and often not under our control. We're just not large enough to account for some of the quarterly swings in revenue that we may experience.

An example, at the end of June, we had almost $1 million in deferred revenue for which we have done most of the work and we've [billed] [arsenal] of payments. And in many cases, we've already been paid for it. So we will recognize that, we believe, in 2017, but it will not be highly profitable, but we will recognize it. So revenues should go up. It's possible that some of that could be pushed out in 2018, and it all depends on the customer being willing to sign off on what he has.

So again, I just emphasize we'll continue to have volatility. The CoreCard operation did experience profits for the 6 months ending June 30, 2017. I guess that's good, but I also question maybe we should have spent a whole lot more in terms of ramp up; that's something we're going to continue to talk about.

Outlook summary. It's already noted in our discussion today. We continue to see gains in all 3 components of our FinTech-focused businesses: licensing, processing and professional services. This growth, obviously, has impacted in a positive way the bottom line. Let's see, we may decide to incur additional businesses by investing in the future growth of the company. That could be from people, it's going to involve more hardware as we set up for new types of businesses. And we have to recognize that the FinTech arena is rapidly changing, and we feel that we're in a position to take advantage of that and continue to grow nice into the [future].

With that, you can see I'm not going to review everything in the press release, I'm not going to talk about what's in the 10-Q. You can read that for yourselves and just sort of to end the call, say that our next conference call will be at the end of the fiscal year unless we have any significant new developments to report.

And operator, at this point, we'll be glad to answer any questions. I might add that one of our loyal, long term, large shareholders, [Stan Roffman], a nice supporting shareholder and understands very well what we're doing, phoned in and said, he wouldn't be on the call today, so I can't expect any questions from him, and he is usually the one that leads the questions. At this point, we will pause for a moment to see if anybody has any questions. Operator, I'll let you take over for that.

(Operator Instructions) Your first question comes from the line of [Sam Rudowski].

It's very informative. So the deferred revenue at the end of the March 31 quarter was $1,000,338, now it's $936,000, so you picked up $400,000. And as you sort of talked about the service revenue, now service revenue is -- could be deferred. Is that correct, Leland?

Not really service revenue. Well, there are PSAs sometimes that stretch out until they're finally finished, if they're real large ones. Generally, it's license revenue that gets deferred.

Okay. So the 265 employees, where the previous quarter you had 270, does it appear the services will continue as long as you have the number of employees? You could create...

Use my numbers as rough numbers, okay? But when I say 265, 270, 275, they're rough numbers. We do some turnover around so, and that's India, we're talking about India employees there. And yes, we could do more services if we had more employees, but remember what I said, it takes about a year to make them effective, so we end up getting a drain while they're learning.

And as far as the research and development, do you have to continue spending this money going forward?

It's always changing. The FinTech space, it's always changes. There's always things you want to do. As an example, we now do a whole lot of things on our mobile phone, that we didn't used to do. We spend money getting mobile applications up to run with our current software. So yes, it's a constant change.

And would you say this large -- in your [Q] last quarter, your 4 largest customers was 11%, 13%, 15%, and 14%. So this large customer that you have is in this range or are they doing more than these numbers right now?

Well, this past quarter, they did a lot more than that number, but that's going to come and go too because, remember, it has to do with revenue recognition. We may have done the same number -- we may have put in the same number of hours, but if we recognize revenue from one, it could jump up to 25%, 30% and then it go back down to 14%. Didn't mean we did more or less work for them in the quarter, it had to do with how the revenue had to be recognized.

Okay. Now with all the mergers and acquisitions that's been going on in your space, have some people come forward to try to acquire you? What is going on? And I guess you sort of spread out all your options and it's going to depend what you and the board think is the best option for Intelligent Systems to maximize value for shareholders. Are we working on any transactions or a lot of transactions where we might see something in the next 6 months?

We're working on no particular transaction at this point.

Okay. Okay. And in [judgment], do we -- in order to increase the processing as you've indicated this company that raised $76 million and is processing a lot more. And you haven't made a decision whether you want to spend more money to sort of ramp up or is that open at this point?

Yes. We're doing a lot of analysis of that. And keep in mind, that company primarily just does one segment of our business which is prepaid, and they do not license their software. So they've got $76 million devoted to what today would probably represent 25% of our revenue.

Yes. The one thing that I've seen, the companies in similar space to you, they spend an awful lot of money, they have a negative equity, they've spent -- they carry a lot of goodwill. And based on that rationale, your company should be worth significantly more, the fact that you've been in the forefront for a lot of companies starting up. And is there somehow a way to sort of capitalize on this and sort of get a higher valuation?

Well, if you know the formula, let me know. Obviously, we're doing what we can, but we're going to run the company on one side as if we're here and going to try to increase shareholder value, on the other side, we're going to be open, but we can't tell people what values are. They decide themselves what they're willing to do.

Okay. Leland, you're doing a good job. And like they say, at some point, you'll take it to the bank.

All right. Thanks, Sam.

Any other questions?

There are no further questions at this time.

Okay. We want to thank everyone for being on the call. And again, if there is any questions that can be answered given the compliance environment, feel free to call myself or Karen. Otherwise, we look forward to having this discussion again on the next call in about 6 months. Thank you, everyone.

Thank you.

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