CoreCard - Q2 2023

Transcript

Operator (participant)

Greetings. Welcome to CoreCard's second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to Matt White, CFO. Thank you. You may begin.

Matt White (CFO)

Thank you, 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 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 filings with the SEC, including our 2022 Form 10-K and subsequent filings. As we noted in our press release, our second quarter results were in line with our expectations. Our professional services revenue remained strong.

We saw sequential and year-over-year growth in processing and maintenance. As expected, we had license revenue for the quarter of $1.8 million. Total revenue for the second quarter of 2023 was $15.7 million, a 3% increase compared to the second quarter of 2022. The components of our revenue for the second quarter consisted of license revenue of $1.8 million, professional services revenue of $7.4 million, processing and maintenance revenue of $5.7 million, an increase of 26%, and third-party revenue of $0.9 million. We did experience a decline in third-party revenues as our customers utilized fewer ancillary services on a year-over-year basis. Customers can perform these services themselves, contract through third parties, or we can provide these services through our direct contracts with third parties.

Services include items such as customer service, statement printing, card production, network fees, and compliance costs. We'd like to re-reiterate that third-party revenues are lower margin compared to our other revenue streams, so there's less of an impact on the bottom line. As noted in our 8-K filing last week, we signed an amendment with Goldman Sachs that, among other things, converts managed services revenue, which is a portion of our professional services revenue, from a time and materials basis to a fixed monthly fee of $1 million. We recognize the slightly higher monthly amount from this revenue stream for the first six months of 2023. While the partial conversion to a recurring revenue structure is beneficial from a visibility perspective, it will result in lower services revenue for the remainder of the year.

As a result, combined with lower than expected third-party revenue, we've adjusted our guidance for the year to approximately 5% for services revenue growth. Revenue growth, excluding our largest customer, was 7% in the second quarter on a year-over-year basis. Slowdown from the first quarter is primarily due to lower third-party revenues, as discussed previously. We continue to onboard new customers, both directly and through various partnerships we have with program managers, including programs with American Express as the network. As in previous quarters, we currently have multiple implementations in progress with new customers we expect to go live in the coming months. Processing and maintenance revenues grew 26% in the second quarter of 2023 compared to the second quarter of 2022. Recently added customers mentioned above were now live and continued growth from existing customers. Now turning to license revenue.

We recognized another license tier in the second quarter of 2023, as expected, resulting in $1.8 million of license revenue for the second quarter. We expect a new license, license tier in the third quarter of 2023. Professional services revenue remained strong in the second quarter. We anticipate professional services revenue in the third quarter in the range of $6.7 million-$7 million. Now turning to some additional highlights on our income statement for the second quarter of 2023. Income from operations was $2.7 million for the second quarter of 2023, compared to income from operations of $3.5 million for the same time last year. Our operating margin for the second quarter of 2023 was 17%, compared to an operating margin of 23% for the same time last year.

The decrease is primarily driven by hiring in India and in our Colombia office that we opened in October 2021, in addition to continued infrastructure investments in our processing environment. Our second quarter tax rate was 24.8%, compared to 23.9% in the second quarter of 2022. Earnings per diluted share for the quarter was $0.22, compared to $0.33 for Q2 2022. As noted in our press release this morning, for the full year, we expect growth in services revenue of approximately 5% and license revenue to be between $3 million and $7 million. We expect growth from customers, excluding our largest customer, dissolve services revenue, to be approximately 11%. We expect license revenue in the third quarter.

However, it's difficult for us to predict the timing of license revenue for the fourth quarter and beyond 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 and second quarters, and we anticipate professional services revenue in the third quarter of 2023 to be like, likely in the range of $6.7 million-$7 million. The lower professional services revenue reflects the change to our Goldman contract, converting a portion of the revenue to a fixed monthly fee. With that, I'll turn it over to Leland.

Leland Strange (Chairman and CEO)

Okay, thanks, Matt. I think you covered all the essential financial things, and I'm, I'm going to talk about a few things, in unprepared remarks, but, just things that people have been asking us. Let me just first comment on the fact that, you talked about India being part of the reason for the difference between last year and this year. I can say at this point, we have pretty much flattened the growth in the India operation based on slower growth here. We have slightly under 1,100 employees as of the end of this quarter, and that counts the, the contractors that we also use full-time. I would say our, our full-time staff is probably about 1,000 employees. We probably have about 80 contractors, most of which are full-time for us, not all.

Then we have maybe 20-25 interns at the present time. In, in reaction to a little bit slower growth, we have taken the step of slowing things down there. Also, we, we are continuing to spend money in, in two areas. One, the Tesla Project, that we call it the Tesla Project, which is the, the new corporate software that's still perhaps two years out. Hopefully, it'll be, it'll be less time than that, and we're certainly going to be using some modules that we're developing in less term, less time. In fact, we'll be putting one of those in this year. We're going to continue to spend in that way. The big question that I'm always asked is: What about Goldman and Apple, and where do you stand based on what they've been saying?

There is some press recently that talked about Goldman is talking to American Express about taking the Apple account. I think the to me that Goldman can't do whatever they want to with those relationships without getting complete buy-in from those two parties. I must say, in the beginning, I know nothing. As, as you would expect, Goldman is very quiet in terms of how they deal with these things. The people we deal with, not only would they not tell us, but the fact is they know nothing because it's really handled at the very top. Everything I say now is just speculation based on my relationship and the amount of time we spent with them, and also knowing about what we do and about our software. Here's what I would speculate. Well, let me back off.

There's one, one place that I won't have to speculate. You know, we filed an 8-K, I guess, a week or so ago that said that Goldman and CoreCard had an amendment to their agreement, so we extended all of our contracts for two years. That will give you some indication of the relationship we have. A part of that moves some of our revenue that was on time and materials to fixed price, and as Matt said, result in a little less income to us over time, but we felt like that was the right thing to do to have a two-year contract and have recurring revenue.

In, in terms of a two-year contract, it's my, my opinion, and I think anybody's opinion, that it would be more than two years from the time you said, "Okay, we're going to move this contract somewhere else to a, another party off of CoreCard." We're, I, comfortable that we'll be processing the Apple Card two years from now. Of course, we're doing it very well. with performance. for two more years. We also very, feel very comfortable with that. Now, I think it's the software. It's perpetual license, and as long as they add new cards, they're going to have to pay us. It's kind of in that sense, but in terms of just the normal things we do for them, it's now a two-year. It's now a two-year agreement. What does it mean? Will they move the, move it? It's possible.

It's highly unlikely, but it's possible. If they do move it, what happens then? Well, it's possible that a new provider will still want CoreCard to process the card. There are a lot of things you do outside of processing. This is the area-- These are the areas that Goldman had problems with, and that's your customer service. That's disputes, you know, dealing, basically dealing with the customer, dealing with some regulatory issues. It was not a problem with the processing, and we were taking care for them. Goldman had never done that before, by the way. If you go to someone new, especially American Express, they do that all the time. They would know how to do that. There's a lot of other people, Discover and other folks.

In fact, there are some rumors that Apple might choose a, a bank that basically a no-name bank and not, not put their name in big letters on the card, and then Apple would take on some of that third-party stuff. Again, I believe we would be the processor for part of that. Other people certainly could do the customer service and the dispute, and that's stuff they, they do better. That's where we stand on that. We don't believe there's a risk of that as long as we do what we're supposed to do, and as long as we do a good job for it, we don't believe there's a risk. We believe we've priced it right. We believe that we provide very, very good service, so we don't see a problem with that. That's usually what people call about.

Everybody's worried about what the press says. I would say the next thing, obviously, growth has slowed. We're seeing, big, medium-sized banks. We don't deal with the big banks right now. The medium-sized banks are really saying, we don't want anything that would get our name in the headlines. We don't want to announce a change of processors. We don't want to do anything that simply would, would be a, that would cause people to take a hard look at us. Other than that, conversation has really just been on hold. We still have a good number of customers that are teed up. They could go by at any point. Likewise, some of them are just kind of putting that on hold as, as the current financial, economic situation figures out.

One thing we are doing that's new is that we're developing a commercial card for a mid-sized bank. I went out and said, things are pretty much on hold, but there's just one situation where we're developing to their spec. Well, I won't say to their specification, but with their help, we're developing a new commercial card product that will go live for what we call friends and family in the fourth quarter. That simply means it'll be in test, it'll be used lightly. It would be rolled out in first quarter of next year. I don't expect huge revenue from that initially. We think it's a very important product for us, particularly the fact that it's being developed hand in hand with the bank, as opposed to just someone coming out with product specifications.

We, we believe it does have really good possibilities both for that good mid-sized bank as well as others in the future. That's... We're doing a lot of new stuff. We've got, still have new clients coming in. They're just not getting to market as fast as we would hope they'd get to market. Matt, any other comments that you hear from folks? Those are the main ones that I hear, that I wanted to respond to.

Matt White (CFO)

Yeah, no, I think that covers it. I don't think, the only thing I would add is that there were three contracts that were extended with Goldman. Two of those were for statements of work that we have with them, and that was a two-year extension. For the maintenance work that we do, that was a three-year extension. That's the only thing I would add.

Leland Strange (Chairman and CEO)

Okay. Let's, let's take it to questions. If we have any questions, as we, as we always say, if you don't wanna ask the questions here on the, the call, we're always open to, to explaining where maybe we haven't explained that well. Operator, let's, see if there are any questions for us.

Operator (participant)

Great, thank you. If you would like to ask a question, please 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 keys. Our first question is from Hal Goetsch with B. Riley Securities. Please proceed.

Hal Goetsch (Senior Managing Director and Head of FinTech and Financials)

Hey, thanks. Thanks, guys, for all the color. My, my question is, expense growth. You, you've had a good overview of the employee count and all like, you know, point out, like, you've had a lot of employee growth in the last, you know, two years or so. Do you think your expense growth here is going to be leveling out, and in the next, you know, year to two years? Thanks.

Leland Strange (Chairman and CEO)

Yeah, yeah, I do. I, I think, there's going to be some inflation impact, obviously, to payroll expenses, but in terms of overall growth, we're not going to need to grow that a lot to take on a good bit more business. We're going to need actually fewer people working on the, the Goldman Apple thing, because that's running pretty smoothly. We think we're in pretty good shape to take on more business without adding a lot. Matt, you want to add anything to that?

Matt White (CFO)

No, that's right. Yeah, there'll be some smaller increases, but overall, we're trying to keep the head count pretty steady, and that's what we've been doing in India, and kind of only adding where we need to. We added enough people last year to where our focus is on getting those folks trained, so they can contribute.

Hal Goetsch (Senior Managing Director and Head of FinTech and Financials)

Okay, great. If I could ask one follow-up. Leland, you mentioned, you know, the banks don't want to do anything that gets their, the name in the papers, and I think that seems to me they want to keep their risk profiles low. Should we be looking for as analysts and investors to, to know when that little, that modest overhang is lifting? What would we see in the economy? What would we see in the regulatory picture, based on your experience, what should we be looking for? Thank you.

Leland Strange (Chairman and CEO)

Well, that's, that's a good question. I need to think about that one a little bit. It, it's, hmm. From an overall economic standpoint, I just think you, you need to... We need the, the overhang that we're getting. With Fitch hitting the credit of the U.S. yesterday and with all, I guess, the market's down, S&P, and the rest of them down almost 2%. S&P down, close to 1.5% today. I think it just need to be, you don't need to see growth. You need to see some, some stability. But it's, it's both political and economic, just some stability so people can just say, let's just get back to business as usual. Nobody feels like it's business as usual right now.

Hal Goetsch (Senior Managing Director and Head of FinTech and Financials)

Yeah. Yeah. Thanks. I would agree with that. I mean, there's many, many small banks that are selling consumer credit portfolios to non-bank financials to improve their ratios. What you're saying makes perfect sense to me. Thanks, thanks for your call. I'll get back in the queue. Thanks.

Leland Strange (Chairman and CEO)

Okay, bye.

Operator (participant)

As a reminder, just star one on your telephone keypad if you'd like to ask a question. We will just pause for a brief moment to see if there's any final questions. There are no more questions at this time. I would like to turn it back over to management for any closing remarks.

Leland Strange (Chairman and CEO)

All right. Well, we just thank you for your continued interest and support. We're going to continue to push forward. We feel pretty comfortable about where we are. We wish things were moving faster at this point, we think we're on the right path, and we'll continue. Thank you, and if any other questions along the way, please give us a call. Thank you very much. Have a great day. Bye.

Operator (participant)

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.