CoreCard - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 revenue was $14.8M (+22% YoY) and diluted EPS $0.24, both above internal expectations due to unexpected license revenue; services revenue tracked in line, with processing and maintenance up 11% YoY.
• Management reaffirmed FY 2025 guidance: revenue $60–$64M and EPS $0.88–$0.94; Q1 2025 guided to revenue $14.4–$15.0M and EPS $0.15–$0.19; no license revenue expected in 2025; professional services guided to $6.8–$7.2M in Q1.
• Operating leverage improved: operating income $2.1M (14% margin) vs $0.4M (3%) in Q4 2023; adjusted EBITDA $3.3M (22.4% margin) vs $1.6M (13.5%) YoY.
• Strategic update: contract with Goldman Sachs extended through 2030 (guaranteed through 2026 at higher managed services rates starting 2025); management is exploring strategic alternatives (potential transaction or succession), which could be a stock catalyst alongside non‑Goldman growth of 30–40% targeted in 2025.

What Went Well and What Went Wrong

• What Went Well

  • Unexpected license revenue drove a clean headline beat; “overall revenue of $14.8 million in the fourth quarter was above our expectations due to unexpected license revenue”.
  • Processing and maintenance revenue grew 11% YoY in Q4 and 7% for FY 2024, evidencing durable platform momentum.
  • Operating efficiency: operating margin expanded to 14% in Q4 (from 3% YoY) and adjusted EBITDA margin to 22.4% (from 13.5%).
  • Quote: “CoreCard is a best‑in‑class platform…well positioned to capture the growing demand for next‑generation card management platforms by large and complex modern card issuers.” — CEO Leland Strange.

• What Went Wrong

  • Services revenue mix remains concentrated in Goldman Sachs; management expects no license revenue in 2025, increasing reliance on services growth and GS managed services rates.
  • Full‑year growth modest (+2% total) with declines in professional services FY‑over‑FY due to Kabbage and ParkMobile impacts; multi‑customer ramp continues to be gradual.
  • Transcript discrepancy: CFO initially cited “$2.2 billion” of Q4 buybacks in one transcript; corrected in parallel transcript to $2.2M (we anchor on $2.2M).

Transcript

Operator (participant)

Greetings and welcome to the CoreCard Fourth Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the full presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Matt White, Chief Financial Officer. 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 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 at the SEC, including our 2023 Form 10-K and subsequent filings. We'll also discuss certain non-GAAP financial measures, including adjusted diluted EPS and adjusted EBITDA, which is adjusted for certain items that affect the comparability of our underlying operational performance.

These non-GAAP measures are detailed in reconciliation tables included with our earnings release. As we noted in our press release, our fourth quarter results were above our expectations due to unexpected license revenue and in line with our expectations, excluding the license revenue, with continued year-over-year growth in processing and maintenance revenue. Total revenue for the quarter was $14.8 million, a 22% increase year-over-year. Services revenue, defined as total revenue excluding license revenue, increased 10% in the quarter on a year-over-year basis, with full-year growth of 1%. The components of our revenue for the fourth quarter consisted of license revenue of $1.4 million, professional services revenue of $6.2 million, processing and maintenance revenue of $6.1 million, and third-party revenue of $1.1 million. Processing and maintenance revenues grew 11% in the fourth quarter on a year-over-year basis, with full-year growth of 7%.

A majority of our professional services revenue is from our largest customer, Goldman Sachs. As a reminder, we converted the managed services revenue we received from Goldman, included in professional services, to a fixed monthly fee of approximately $1 million for 2024. In October of 2024, we extended our managed services contract through the end of 2030 and guaranteed it through at least the end of 2026 at a higher monthly rate that starts in 2025. Revenue growth, excluding our largest customer, and the impact from ParkMobile and the legacy Kabbage business was 29% in the fourth quarter on a year-over-year basis and 33% for the full year. We continue to onboard new customers both directly and through various partnerships we have with program managers such as Deserve, Verve, and Cardless.

We continue to work on multiple implementations with new customers that we expect to go live in the coming months. As a reminder, these new customers typically build their account base over time, paying mostly our minimum fees of $10,000-$15,000 per month in the initial 12-18 months of their program. We expect our new customers to become more significant as they grow their own businesses, and we are seeing the impact of this and the significant growth rates of our non-Goldman business. Turning to some additional highlights for the fourth quarter and full year for 2024, income from operations was $2.1 million for the fourth quarter of 2024, compared to income from operations of $0.4 million for the fourth quarter of 2023. Our operating margin for the fourth quarter of 2024 was 14%, compared to an operating margin of 3% for the same period last year.

The income statement impact of our new platform build was $0.7 million in the fourth quarter of 2024 and $2.7 million for the full year of 2024, compared to $0.6 million in the fourth quarter of 2023 and $1.8 million for the full year of 2023. Our fiscal 2024 and 2023 tax rate was 21.1% and 24.5%, respectively. We expect our ongoing tax rate to be between 24% and 26%. Earnings per diluted share for the quarter was $0.24, compared to $0.06 for Q4 2023. Full year 2024 diluted EPS was $0.67, compared to $0.40 for the full year 2023. Adjusted diluted EPS for the quarter, excluding stock-based compensation expense, was $0.28, compared to $0.06 for Q4 2023. Full year 2024 adjusted diluted EPS was $0.79, compared to $0.53 for the full year 2023. We generated operating cash flows in 2024 of $5.8 million.

We used $7.6 million on share repurchases in 2024, including $2.2 million of share repurchases in the fourth quarter of 2024. We continue to have excess cash on our balance sheet as of December 31, 2024, and we expect to continue generating operating cash flow in 2025. We plan to use this excess cash and cash generated from operations to continue investing in our new platform and to continue investing and growing the business. For 2025, we expect revenues of $60 million-$64 million, earnings per share between $0.88 and $0.94, and revenue growth, excluding Goldman, of 30%-40%. We do not expect any license revenue in 2025. Within services, we expect continued growth in processing and maintenance and growth in professional services, reflecting the impact of higher managed service rates from Goldman.

For the first quarter of 2025, we expect total revenue between $14.4 million and $15 million, and earnings per share between $0.15 and $0.19. We expect professional services revenue to be between $6.8 million and $7.2 million for the first quarter of 2025. With that, I'll turn it over to Leland.

Leland Strange (Chairman and CEO)

Okay. Thanks, Matt. I'll start off with a light comment. Matt received a text this morning after our earnings release, and I received a call. His text said, "Marketing cost up 30%. Have you lost your mind?" Now, for those new to us, we don't spend any money on marketing, virtually any money. We don't spend money, and we have no salespeople. Up 30% on $100,000 is nothing. That was said in jest. Yeah, no, we haven't lost our mind. We still have no salespeople. We still spend very little on marketing. I got a call also this morning after the release from one of our long-term advisors, and he said, "I'm surprised you're still doing this. I thought you said you were looking for younger leadership for the last couple of calls." We are.

I told him as long as Matt keeps reporting good results and things keep going really good, maybe I'll hang around, but not really. I'll say more about that at the end of the call. Just as Matt said, our revenue and profits, they exceeded our expectations due to another license year payment. Everything else is pretty much what we expected. I don't expect another license year surprise this year, but I'm not going to say it will not happen. Our processing and license revenue components grew just 7% for the year, but 11% for the quarter. Adjusted for a couple of old customers that were acquired by other parties in 2023 and had to leave the platform, we were up, I believe, over 30%. That's the number that I look at.

It is really, what kind of new business are we acquiring outside of our largest customer? For 2025, we do see revenue north of $60 million. Most importantly, for metrics and long-term projections, we believe we will grow 30%-40%, excluding our largest customer. We see a path for that to continue in future years. Total revenue for the year actually could be even in the $64 million or higher range, although we had rather guided to a little bit lower, and we do not have that confirmed and under contract at this point. I will say we have already signed three new customers this quarter, typically fintechs, and they will go live in the next few quarters, and they are small, and it will take time for them to grow.

At least one of those that we signed is moving from another so-called modern processor who just could not reconcile accounts, which CoreCard, of course, does every day to the penny. I think the newer processors who are trying to compete in the revolving credit space are finding what I found to my surprise many years ago, that trying to reconcile revolving credit card balances is really hard for the data for the networks often gets corrected a day later. Cardholders pay the wrong amount days late, and then they claim they paid on time, so a human has to decide whether to change the payment receipt date or not. Returns are sometimes taken several months later, and they end up being partial returns for which interest has already been charged. In some cases, the portfolio which is holding the credit has actually been sold off.

The regulator says, "Prove to me the interest conforms to the published card's terms and conditions." That's hard. You have to keep all those details, which is legally required for seven years, with sometimes regulators going back to a transaction made several years past to prove or disprove a claim. Not easy. It's not primarily a technology challenge, but a business knowledge challenge that has to be transformed into technology outcomes. That's why the legacy processors have had no real competition in 40 years. They know how to do this, and they know how to do it at scale. Any smart coder can do it for a few hundred or a few thousand accounts. You just manually adjust for errors, but it doesn't work when you've got millions of accounts.

I believe CoreCard is the only modern processor that can legitimately compete with a legacy processor today for a large-scale revolving credit program. I know of no other modern processor that has even 500,000 active revolving credit cards. CoreCard has around 50 million on their platform. A comment about our new platform called CoreFi. It's incorporating all of the complexity and features of the current platform, but using the latest technologies and architected for the cloud. Most importantly, it's factored in time travel testing that will speed up adding unique programs for innovative issuers. I guess that brings me full circle of my opening comments. I previously talked about companies inquiring about CoreCard as a possible acquisition candidate. I've been forever open and regularly say we always strive to do what's best for shareholders.

That might mean selling the company to a larger enterprise that can more easily scale the value from our platform. At the same time, we get up every day and run the company as if it's going to be independent forever. We have, over the last few months, had dialogue with different parties and more recently focused on discovery of what interests may be in the financial services market for a first-class revolving credit platform, both our current proven scalable semi-modern platform as well as our newer CoreFi platform. The board wants to make a decision to either do a transaction or quit talking about it and focus on finding a new president.

I'm not going to be the president who gets to take advantage of the future CoreFi platform, as we'll either partner with someone else rather soon or we'll go find the right president to keep building. That said, we put in place an informal but comprehensive process to discover interest in order to maximize value for our shareholders. We'll know in the next few months the future direction, and it may simply be turning this great company over to a successful president to continue building, or it may be accepting an acquisition offer. I guess finally, because I know I get questions on this, talk about the status of the Goldman Sachs relationship. Matt talked, and we've talked about the amended contract last call that goes through 2030, but does have termination rights with compensation after the end of the 2026 year.

Nothing has changed on that end, and I continue to speculate, as I have in the past, just based on news we all read, that Goldman would get out of the issuing business as soon as it can, and a new bank will take on the Apple program. The press reports that conversations are going on with different banks, and I would certainly expect that to be true. I have no information that would provide any certainty that whatever new bank is chosen would keep the program on CoreCard. All banks have existing agreements with processors, either FIS, Global Payments, or Fiserv, but JPMorgan Chase mostly does their own processing. CoreCard would hope to maintain the processing and will do whatever it can to keep the valuable client that introduced the most successful new credit card ever to the market.

I know any of the legacy processors could eventually code to the current card specs. I also believe it would take two to three years to transition, as Apple expects perfection, and then go through months of testing. I say that also believing that keeping CoreCard would be the best outcome for whatever bank ends up with the program. It can be less risk and no more costly. Other than that, I have nothing more to add. At that point, I'll take questions that you might have with Matt or I.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. 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 to remove yourself from the queue. The participants using speaker equipment, it may be necessary to pick up their handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Hal Goetsch with B. Riley Securities. Please proceed with your question.

Hal Goetsch (Managing Director)

Hey. Thanks for the chance to ask a question here. I just want to make sure I heard you correctly. In your forecast, there's no planned license fees expected in 2025. Is that right?

Leland Strange (Chairman and CEO)

That's right.

Hal Goetsch (Managing Director)

Yeah. Is that to be conservative? You would think maybe you had some new issuers in the pipeline that would make an initial first license or an initial first license for a new program when. I hope this doesn't mean you don't have a pretty good funnel that you've been working on. Can you give us your thoughts on why?

Leland Strange (Chairman and CEO)

No, no. That's the Goldman situation. That's where we get the license here. We're not primarily in the licensing business. Yeah, we're in the processing business now.

Matt White (CFO)

Yeah. We expect new customers to be on the processing side rather than the license side. If something big did come in, we would still bring on a licensed customer, but that's not our focus at the moment.

Hal Goetsch (Managing Director)

If you were to onboard a new customer, it would show up in both maybe some professional services launch and maybe some third-party for cards, and then you'd get the processing afterwards. Is that how it would?

Leland Strange (Chairman and CEO)

Yeah.

Hal Goetsch (Managing Director)

Yeah. Okay.

Matt White (CFO)

That's right. Yeah. Mostly in the processing maintenance line.

Hal Goetsch (Managing Director)

Okay. Okay. Good. Okay. Help us think about total dollars of cost to run the business this year. Your marketing, G&A, and R&D have kind of been quite variable in terms of movement. It was $3 million in Q1, but it almost hit $4.5 million in Q4. Any points there on just kind of dollars of spending to run the business as you kind of execute in 2025?

Matt White (CFO)

Yeah. We do expect some increases in cost in 2025, but we don't need to add a lot of personnel, and we don't need to add a lot of equipment to support the growth that we're expecting in 2025. We think we have the people that we need. Primarily, the increase in overall costs will be just normal cost of living adjustments for salaries and just other costs that come along to run the business. We're not expecting a significant increase year over year in operating expenses from 2024 to 2025.

Hal Goetsch (Managing Director)

Okay. Okay. And you have about 15 million cards right now on the platform. Is that what Leland said? Is that right?

Leland Strange (Chairman and CEO)

No. I said there's nobody that we know of in terms of the modern processors that have even $500,000 revolving credit cards, and we have around 15 million revolving credit cards in one instance, actually.

Hal Goetsch (Managing Director)

Yeah. Right. That's what I'm making sure I heard that number right. Yeah. I heard that the others don't have 500,000. That's what I'm making sure I heard that right. Okay. It's perfect.

Leland Strange (Chairman and CEO)

That's right. No one else.

Hal Goetsch (Managing Director)

Yeah.

Leland Strange (Chairman and CEO)

Yeah. So we're far, far ahead of any other modern processors in terms of numbers, and scale is important. Building scale.

Hal Goetsch (Managing Director)

Okay. Okay. All right. Those are my questions. I'll follow up after with you guys. If I have some extra questions, I'll get back in the queue. Thanks.

Matt White (CFO)

Thanks, Hal.

Operator (participant)

Thank you. We have reached the end of our question-and-answer session. This also concludes today's conference. You may disconnect your lines at this time. We do thank you for your participation.