CoreCard - Q1 2023
May 4, 2023
Transcript
Matt White (CFO and Secretary)
Good morning, everyone. With me on the call today is Leland Strange, Chairman and CEO of CoreCard Corporation. He will add some additional comments and answer questions at the conclusion of my prepared remarks. Before I start, I'd like to remind everyone that during the call, we'll be making certain forward-looking statements to help you understand CoreCard Corporation and its business environment. These statements involve a number of risk factors, uncertainties, and other factors that could cause actual results to differ materially from our expectations. Factors that may affect future operations are included in our filings with the SEC, including our 2022 Form 10-K and subsequent filings.
As we noted in our press release, our strong performance continued in the first quarter of 2023, and we are pleased with our services revenue growth of 25% on a year-over-year basis. The components of our revenue for the first quarter consisted of professional services revenue of $8.3 million, processing and maintenance revenue of $5.4 million, and third-party revenue of $1 million. As expected, we did not have any license revenue for the quarter.
Total revenue for the first quarter was $14.8 million, a 39% decrease year-over-year, driven by a decline in license revenue from twelve and a half million dollars in Q1 2022 related to the conversion of the General Motors portfolio, compared to zero license revenue in the first quarter of 2023, which again was expected. Services revenue, defined as total revenue less license revenue, grew 25% in the quarter on a year-over-year basis.
Within services, processing and maintenance revenues grew 34% in the first quarter on a year-over-year basis. Professional services revenue grew 27% on a year-over-year basis. Revenue growth, excluding our largest customer, was 23% in the first quarter on a year-over-year basis, excluding revenues from both Goldman and GreenSky, an acquisition that Goldman completed in March 2022. We continue to onboard new customers both directly and through various partnerships we have with program managers such as Deserve, Vervent, and Cardless. As in previous quarters, we currently have multiple implementations in progress with new customers we expect to go live in the coming months.
Turning to some additional highlights on our income statement for the first quarter of 2023. Income from operations was $1.8 million compared to $11.8 million for the same period last year. Our operating margin was 12% compared to an operating margin of 48% for the same period last year. Year-over-year decline in our operating margin was primarily driven by previously mentioned lower license revenue in 2022 hiring in India.
Our head count was mostly flat from year-end, and we expect to stabilize our head count in 2023 as we continue to grow our revenues without adding a significant number of new people. Our Q1 2023 tax rate was 24.7% compared to 25.8% in Q1 2022. We expect our ongoing tax rate to be between 25% and 27%. Earnings per diluted share for the quarter was $0.15 compared to $1.00 for Q1 2022.
As noted in our press release this morning, for full year 2023, we expect growth in services revenue of approximately 10% and license revenue to be between $3 million and $7 million. We expect growth from customers excluding our largest customer, which is all services revenue, to be approximately 20%. We expect license revenue in future quarters in 2023, starting in the second quarter. It's difficult for us to predict the timing of license revenue for Q3 and Q4 for reasons we've discussed previously. Within services, we continue to expect strong growth in processing and maintenance as our customers continue to grow and as we continue to onboard new customers.
Professional services revenue continued to be strong in the first quarter. We anticipate professional services revenue in the second quarter of 2023 to be likely in the range of $7.2 million-$7.4 million. We're expecting some slowdown in the growth of professional services for the rest of 2023. However, we expect that revenue stream to remain at a high level. With that, I'll turn it over to Leland.
Leland Strange (Chairman and CEO)
Okay, thanks, Matt. This is a quarter where I'm going to have very little to add to Matt's comments. The quarter was actually stronger than we had anticipated, even what we had anticipated at the beginning of the quarters. I don't want to read too much into that. As Matt said, we're going to be cautious for the rest of the year. All of our customers are carefully watching their spend, as we are. We had previously, even a year ago, said the year-to-year overall comparison would not be good as we had a very large record license revenue in the 2022 quarter that was not repeatable.
From an overall business perspective, we continue to bring on new clients, albeit smaller ones, all of whom hope to grow to be large in the future. Every quarter, we have new customers going live with new offerings. The likelihood of a big name or a big conversion is not as strong today as it was even six months ago due to the turmoil in the banking sector. We're still having those conversations, but I have to believe the risk appetite for banks has greatly diminished, and they'll generally prefer to just remain under the radar.
We'll see how long that lasts. No one knows the outcome, as the regional banks now are really under the gun. Even today as we speak, we've seen stock prices for a couple of the major regional banks go down 20%, 30%. That does impact us. We do have a smaller bank that will be going live this year for sure. We may have two, but I don't have anything big right now as folks are just talking and saying we're waiting and seeing, kind of see how things develop. I'm going to- I got an email yesterday with some question from a shareholder. I thought I'd share my answers that I gave him with you.
I'm going to comment on the ISS vote recommendations, which will conclude my comments before we have open it for questions. One of our shareholders sent Matt an email yesterday or the day before and said, "Well, there's not many questions being asked from the call, so would you guys be willing to answer this?" I sent him the answers, so here are the questions. "Does the Apple savings option involve the use of CoreCard software? If so, what impact is there for CoreCard?"
I answered that by saying the Apple credit card is used for info gathering, but not directly involved in the savings option. That helps to increase the number of cards, CoreCard benefits with more cards. I will add, of course, that they're offering 4.15% savings, that definitely is causing more cards to be added as people want to grab that savings at Goldman. Second question, was, "does the Apple BNPL option involve the use of CoreCard software? If so, what impact is there for CoreCard?"
I answered, similar to the above, CoreCard is not directly involved with Buy Now, Pay Later for Apple. Now, the next question is a tough one, I'm going to go ahead and read it. What percentage of the software engineers hired in the past 12 months are working such that they're directly contributing to the net profits of CoreCard? I think the question was really, you're still hiring. Are the people that you're hiring, are they making money?
My answer was, This is not answerable, as engineers are hired for a variety of tasks, and we do not separate engineers that are directly in revenue-producing tasks. For example, our licensing customers pay us maintenance as a percent of the license, and some engineers are working on things that have immediate impact and others on longer-term projects that will benefit the licensing other maintenance.
Then, two more questions. One is, "how much of CoreCard's free cash flow is being used to develop the upgraded software? When do you expect the upgrade to be significantly completed?" My answer: you don't separate the income streams into free cash flow, so again, not answerable. Software in this business is never complete. We'll be using some of the new software this year, but it'll be at least two more and maybe three years to fully have a new version.
Finally, the last question was: How much benefit will the upgraded software be to attracting new business or creating a significant, a significant competitive advantage for CoreCard over its competition? My answer, management believes the new software is required to be competitive 3+ years out, even though the older software will still be used. The new software should have lower operating costs, which will be advantageous in bidding for new business. There are no silver bullets that will provide significant competitive advantage as decisions are made not only on functionality and features, but also pricing.
I got a response to my answers, which, let me see if I can find that, which I thought was surprising. He said, and I won't give you his name. He said, "Thanks for taking the time to answer my question. I appreciate your straightforward candor in your shareholders' letter stating that you're building the company brick by brick." Then he said, "INS was the first stock I bought when I moved to Atlanta," now get this, "around 43 years ago. I look forward to the conference call." Thank you for the questions, and I will also say thank you to many of our long-term shareholders. I think we're very unusual in the sense that we have a bunch who have really stayed around for a long time.
My next comment is going to be about ISS. As the institutions know, but all shareholders may not know, the ISS actually sends out recommendations to institutions on how they should vote for at companies' corporate annual meetings. Last year and also this year, they recommended that the institutions vote against the chairman of the audit committee. It's simply because the ratio of audit to non-audit fees is higher than a certain minimum. It's good policy, frankly, to keep audits separated from consulting fees to make sure you don't taint your auditors, and we totally and completely agree with that. In our case, it's somewhat different, and Matt may weigh in on here.
Just to give you an idea, this past year, our audit fees were $112,000, the other fees that were billed were $188,000. Audit, $112,000. Other fees, $188,000. That means the ratio is greater than 50/50, which is kind of their minimum cutoff in terms of their formulas. The reason we have $188,000 in other fees, though, is because of SOC compliance that's required for companies that are in processing services. These are not consulting services, and Matt help me out here, but they're totally independent.
Matt White (CFO and Secretary)
They require our auditor to be independent, you know, if they're not independent, for those services, they wouldn't be able to provide them, similar to the way they need to be independent, in providing audit services. We kind of view those in a similar way, although, they do fall under the non-audit services bucket for purposes of the proxy statement, and ISS looks at that as just non-audit fees and then calculates the ratio, as Leland said.
Leland Strange (Chairman and CEO)
Of that $188,000, majority of it is actually repaid to us by our customers, Goldman Sachs and others. We simply use [inaudible] both in our own environment as well as the other environments in order to get some efficiency in cost. We could easily go and get a third party just so we can meet the rule, but our costs would go up, and I'm choosing to spend the shareholder money in the best way possible rather than worry about that particular formula. It will cause a recommendation against a vote for whoever may be the chairman of the audit committee on any particular year. Hope that's helpful for some of you. With that, I'm going to open it up for questions. Don't really have a lot of other comments.
Operator (participant)
Thank you. Ladies and gentlemen, at this time, we'll be conducting a question-and-answer session. If you'd like to ask a question, you may press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment while we poll for questions.
Leland Strange (Chairman and CEO)
If there are no questions, I think we did have one sent in. Let me kind of rephrase it. They ask, "Are there any game changers coming up?" I think I answered that. Given the current environment in the banking environment, I'm not going to project any game changers coming up. We're going to continue brick by brick building the company, staying profitable and, you know, waiting the time out till some of this turmoil settles, then we'll go back and look for the game changers. With that, I just want to thank you for your attention.
Operator (participant)
We do have a question. I'm sorry.
Leland Strange (Chairman and CEO)
Okay, go ahead.
Operator (participant)
We have a question from Hal Goetsch with B. Riley. Please proceed with your question.
Hal Goetsch (Senior Managing Director and Head of FinTech and Financials)
Hey, good morning, guys. I've got a quick question on first question is on expense growth. I think you mentioned you're going to hold employee count pretty steady after a big investment in headcount over the last year. I think your 10-K said you ended with total employees around 1,200 when you filed it, and maybe it was, you know, 750 maybe 15 months ago. Do you think that this is a pretty good level of G&A spend and service spend in dollars, you know, for the rest of the year that we're seeing right now?
Leland Strange (Chairman and CEO)
Well, I'm going to say on personnel in terms of headcount is going to be remain pretty steady. I think inflationary costs, I don't know how to predict all of those yet, so there probably will be an increase just simply due to inflationary costs. Generally spend is under control, and we'll be watching it, I'm going to even say more carefully than we have in the past, given the fact that we're holding a little bit right now.
Personnel will pretty much stay, you know, stay in this neighborhood. It all depends on, you know, people we lose. We'll continue to hire, but you also always lose, and you may not get that ratio exactly right all the time. It's going to be... What do you think, Matt?
Matt White (CFO and Secretary)
That's right. We should be able to stabilize hiring this year. Not, you know, maybe there's a little bit of up and down quarter to quarter, as Leland said, but, kind of keep that steady and, continue to grow revenues with the, with the current level of headcount that we have.
Leland Strange (Chairman and CEO)
The other expenses are mainly going to be inflationary.
Matt White (CFO and Secretary)
Right.
Leland Strange (Chairman and CEO)
-hits with us. There will be some increase in salary recourse.
Hal Goetsch (Senior Managing Director and Head of FinTech and Financials)
Okay. My next question is on maybe the mix of generally speaking, of what are the kind of companies that you're courting right now for new card programs between international issuers, domestic issuers, large and small, and then, you know, emerging fintechs that are still growing accounts and want to add card programs, kind of what's kind of the lay of the land right now after Q1?
Leland Strange (Chairman and CEO)
Yeah. It's a little of all of those. It's hard for me to put a percentage. There's going to be some international growth we expect. It's not going to be huge. There'll be some international. We continue to add emerging fintechs. We're continuing to, we will add some folks who are, I'm not going to call them emerging fintechs, they may be starting newer programs, maybe some smaller. We do have some smaller banks that are going to continue to do some things. The midsize regional banks are not going to do anything. We're in conversations, I'm just trying to give you my best guess of the lay of the land that it's not going to happen.
I can't imagine them, despite the conversations, no matter how positive they are, I just can't imagine them wanting to get out in front of regulators on any kind of risk whatsoever.
Hal Goetsch (Senior Managing Director and Head of FinTech and Financials)
Okay. Okay. I guess one follow-up, you know? Are you seeing issuers, you know, looking for differentiation in the marketplace by offering new types of cards like, you know, metal cards or economically eco cards or is there?
Leland Strange (Chairman and CEO)
Well.
Hal Goetsch (Senior Managing Director and Head of FinTech and Financials)
Are you seeing any?
Leland Strange (Chairman and CEO)
Yes. Yes. It's not so much, the physical card that we're seeing. We're seeing differentiation in terms of offerings. Mainly what we're seeing is that people want to be able to make changes to their program faster. That's really hard to do with the large legacy processors, and for good reason. That's not to knock them. For good reason. They got a lot of people on their system, and you've got to be very careful, and you've got to define it well in advance. So mainly what we're seeing is people want speed to, as they see the market and the landscape change, they want to offer new things quickly.
In some cases, the bigger guys want to try out some things that they don't even know are going to be music to suffer or not, but they want to test them. We're talking to the bigger guys mainly who say, "We want to move quicker. We want to have more flexibility." In terms of the ongoing processing, it's fine. We're happy what we're getting. And we're really happy with the price we're getting. We would like to. We're stuck. We can't have the mobility we'd like to have. That's kind of what we're hearing.
Hal Goetsch (Senior Managing Director and Head of FinTech and Financials)
Okay. Okay. What's an example? Last question from me, I'll get back out of here, the queue, back in the queue if there's more questions. What's kind of the example of a tactical change that your software allows you to make quickly? Is it like allowing a card to have maybe an installment loan on the same statement? Just own calculation.
Leland Strange (Chairman and CEO)
Well, that could be one, but you just might want to. I'm not going to say just interest rate, but you might want to. Well, here's an example recently where a commercial bank said that we want to issue a card that would let folks, if they pay it in seven days, there's no interest. If they pay in 14 days, there's this much. If it's 21, it's this much. If it's 30, it's this much. If it goes over 30, we don't want to let them have any more credit.
You can take all that's parameters, but boy, that's really hard when you start cascading the different interest rates in a particular month, in a particular statement cycle and make sure you get it right for the regulators. that's just a little example.
Hal Goetsch (Senior Managing Director and Head of FinTech and Financials)
Oh, that's just pretty complex. That's kind of top on the supply scene.
Leland Strange (Chairman and CEO)
We could do that, we could do it pretty fast. You know, we could set up a sample program. They could do that and test it in a week or two, where it's going to take months to do it somewhere else. It really is more of a state of mind, I think, where the larger guys know that they're hung, so they don't need any innovative thinkers about how we could change our program, what we could do with our customers, because they can't do it quickly anyway.
They're not all sitting there, well, we got 100 ideas, they're sitting there saying, "Well, we've had ideas, and we couldn't implement them. What would happen if we come with you? How fast can we implement them?"
Hal Goetsch (Senior Managing Director and Head of FinTech and Financials)
Excellent. Thank you.
Operator (participant)
Our next question comes from the line of Khadir Richie with Richie Capital Group. Please proceed with your question.
Khadir Richie (Founder and Chief Investment Officer)
Hi, good morning, gentlemen.
Leland Strange (Chairman and CEO)
Morning.
Khadir Richie (Founder and Chief Investment Officer)
-taking my question. Wanted to see if you could give us a bit more insights on the type of upgrades you're, you know, making to your software, you know, to the extent that you can talk about it. What's the high-level strategic evolution strategy? Then I'd also really like to get your thoughts on the evolving ecosystem within card processing and, you know, where do you see the market going and what gets you excited as far as future CoreCard opportunities?
Leland Strange (Chairman and CEO)
Sure. In terms of what we're doing in terms of I don't know whether to call it a rewrite, a new version. but it's written. What we're doing is coming from a blank sheet of paper. It's not using what we have other than business inference. It uses all the latest technologies that are in place now, including anticipating things that are being talked about. You can even talk about AI with that. The idea is that you want to make sure you have the latest and greatest software out there 3-10 years from now to do what may happen.
That ties into your next question. Oh, let me add one more then I'll tie it in. Another other thing is, obviously, when most of us wrote our software originally, yes, the cloud was around, and yes, we made it work on the cloud, but we didn't have full understanding of the implications of, you know, how many data centers will be out there. How do you do this internationally? How do you go across different time zones? How do you settle throughout the world, internationally, the way money is moving now?
We've taken everything that we know and what we're projecting, and that's where I'm going next, in terms of writing new software. In terms of where I see the landscape, and I'm talking about several years out, not right now, is that instead of dividing what's in your wallet into a bunch of different pockets, it's really just money.
Whether it's, whether it's in a savings account or whether it's on a credit card or whether it's on a, what we'll call a Buy Now, Pay Later, or whether it's on an installment or wherever it is, it's just money in your wallet. Then there's decisions made about how best to utilize that. Now, I guess go back to what I just said a while ago. You know, I said now Apple's Buy Now, Pay Later is not really in what I'm going to call our wallet. Well, I mean, it's all their wallet, but it's not all on the same account that we're keeping for the credit card. What I vision in the future is all of these things are going to be on one account, and it's just money.
We're trying to build a system that will put all of this in one account, and then wallets will determine how it gets, how it gets distributed. That's a very high level.
Khadir Richie (Founder and Chief Investment Officer)
Okay. Then just one follow-up. You know, with the legacy processors, you know, that haven't been as aggressive about making this evolution and evolving with the market, like, where do you feel like they'll stumble?
Leland Strange (Chairman and CEO)
It's little by little. They're not going to really stumble. It's just going to be a slow erosion from what they're doing now. I don't see any tipping points. I see erosion. Look at what they're doing now. You can see that. Look at the reorgs they're all trying to do, the big guys. you know, getting rid of Global Payments building back up, getting rid of Worldpay. I just see it as stumbles. Many of those stumbles will be covered by reorgs, which often happens, or acquisitions. Nevertheless, when you look through it, they're just stumbles.
Khadir Richie (Founder and Chief Investment Officer)
Okay, thank you.
Operator (participant)
Our next question comes from the line of Avi Fisher with Long Cast Advisers. Please proceed with your question.
Avram Fisher (Founder, Principal, and Portfolio Manager)
Hi, thank you. Hi, Leland. Hi, Matt. I had two quick questions. The first one, you know, I'm bad at math, and I'm wondering if you could help me with it. You guys did roughly $70 million in sales last year, and you're guiding to 10% top line growth, which gets to $77 million. You're guiding to license of 3 to 7-
Leland Strange (Chairman and CEO)
No, no.
Avram Fisher (Founder, Principal, and Portfolio Manager)
At the high end of that.
Matt White (CFO and Secretary)
10% services growth, Avi.
Leland Strange (Chairman and CEO)
Avi, 10% services growth. We've said for a year, we're not going to be able to add back all of that license revenue this year.
Avram Fisher (Founder, Principal, and Portfolio Manager)
Right. You're talking about 10% growth on the services side?
Leland Strange (Chairman and CEO)
Yes.
Matt White (CFO and Secretary)
That's right.
Avram Fisher (Founder, Principal, and Portfolio Manager)
54 + 5 gets to 60-ish.
Matt White (CFO and Secretary)
Right.
Avram Fisher (Founder, Principal, and Portfolio Manager)
Thank you for the clarification. Just to layer on top of that, Goldman's roughly flat, so that entirety of that 10% growth is roughly incremental, like new customers coming on board.
Leland Strange (Chairman and CEO)
Roughly. I mean, there's going to be some increase on... Well, we don't know.
Matt White (CFO and Secretary)
You have to look at the, you have to look at the components of the revenues there. You've got the decline in license revenue from $16.1 million to $3 million-$7 million, that's Goldman related. You're going to see some services growth, you know, from Goldman, also,
Avram Fisher (Founder, Principal, and Portfolio Manager)
Most of it's from new customers.
Matt White (CFO and Secretary)
Right. That's right.
Avram Fisher (Founder, Principal, and Portfolio Manager)
Do you get some scale in that and therefore some, you know, sort of leverage on the margin there?
Matt White (CFO and Secretary)
Well.
Avram Fisher (Founder, Principal, and Portfolio Manager)
You know, you were at 34% on the services side this quarter.
Matt White (CFO and Secretary)
Well, we do expect as we stabilize our head count and, you know, just kind of look at our all of our costs and continue to grow revenues, we should see some leverage on the services margin in 2023.
Avram Fisher (Founder, Principal, and Portfolio Manager)
Got it. Okay. The second quick question is, you've invested in the Middle East, you've talked about investments in the Middle East. You know, revenue has grown there year-over-year, but it's still fairly small. I just wondered if you could talk a little bit about sort of where that business could go, where it is relative to your expectations. Thank you.
Leland Strange (Chairman and CEO)
We expect it to continue to grow. It's going to be small, but it's continuing to grow. We've got some new things planned for this year.
Avram Fisher (Founder, Principal, and Portfolio Manager)
All right. Thank you.
Leland Strange (Chairman and CEO)
Yep.
Operator (participant)
There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.
Leland Strange (Chairman and CEO)
Well, again, thank you for both your questions and for your time. Always, if you have further questions, Matt and I are available to try to answer those. Again, thank you for your continued ownership of the company. We'll continue to try to be good stewards of that trust you place in us. Thank you.