CoreCard Corporation

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 at the SEC, including our 2021 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. And as expected, we had license revenue for the quarter of $1.8 million. Total revenue for the second quarter of 2022 was $15.2 million, a 14% increase compared to the second quarter of 2021. As a reminder, we recognized approximately $600,000 of maintenance revenue from our former customer Wirecard in the second quarter of 2021. Excluding the one-time impact of this revenue in the second quarter of 2021, revenues grew 19% in the second quarter of 2022 compared to 2021. The components of our revenue for the second quarter consisted of license revenue of $1.8 million, professional services revenue of $7.6 million, an increase of 25%, processing and maintenance revenue of $4.5 million, an increase of 8%, and third-party revenue of $1.3 million. We continue to onboard new customers both directly and through various partnerships we have with program managers such as Deserve and Vervant, We currently have multiple implementations in progress with new customers that we expect to go live in the coming months. We are working on launching a new program with an existing customer, Cardless, on a co-branded card with American Express. Once live, we will have a direct connection with American Express, similar to what we have with Visa and MasterCard today, and we will be able to process other customers who want to use the American Express network. We say this a lot, but as a reminder, there are always several parties involved in implementations other than the issuer processor, including banks, networks, and other third-party service providers. Issues with any one of these can cause delays in a program launch. As I mentioned, processing and maintenance revenues grew 8% in the second quarter of 2022 compared to the second quarter of 2021 from the recently added customers mentioned above who are now live and continued growth from existing customers. Processing and maintenance growth over the same periods was 26% excluding the Wirecard impact discussed earlier. Revenue growth excluding our largest customer and excluding the impact of Wirecard was 30% in the second quarter of 2022 compared to the second quarter of 2021. One thing to note about our revenue from Goldman Sachs, they closed on their acquisition of Green Sky at the end of the first quarter of 2022. Green Sky was an existing customer for us for a portion of their business, and starting in the second quarter of 2022, these revenues are now included in the customer A total in our quarterly and annual filings. Turning to license revenue, we recognized another license tier in the second quarter of 2022 as expected, resulting in $1.8 million of license revenue for the second quarter. We do not expect a new license tier in the third quarter, but could achieve a new tier in the fourth quarter of 2022. Professional services revenue remains strong in the second quarter. We anticipate professional services revenue in the third quarter in the range of $6.7 to $7 million. We consider this revenue to be repeating as evidenced now by four plus years of significant growth in professional services. However, there are still fluctuations quarter to quarter we can still have both positive and negative surprises from what we expect, although we don't anticipate any huge surprises either way. Turning to some additional highlights on our income statement for the second quarter of 2022, income from operations was $3.5 million for the second quarter of 2022 compared to income from operations of $3.9 million for the same time last year. Our operating margin for the second quarter of 2022 was 23% compared to an operating margin of 29% for the same time last year. The decrease is primarily driven by lower license revenue and continued hiring in India and in our Columbia office that we opened in October 2021. Our second quarter tax rate was 23.9% compared to 26.3% in the second quarter of 2021. Earnings per diluted share for the quarter was $0.33 compared to $0.32 for Q2 2021. We remain incredibly optimistic about our long-term prospects and believe the investments we've made in our infrastructure and in hiring and training new people will continue to yield new customer wins and revenue growth. Due to our solid performance during the first half of 2022, we are confident in top-line growth expectations of at least 30% for fiscal 2022. compared to our previously provided guidance of a range of 25% to 30%. The opportunity ahead of us is significant, and CoreCard remains a growth business focused on meeting the evolving needs of modern issuers while generating long-term value for our shareholders. With that, I'll turn it over to Leland.

Okay. Thanks, Matt. I guess I should comment first on the increase in top-line growth estimate for 2022, where you've moved it up to 30%, at least 30%. I said 25%, 30%, but I'm going to hold that to the end. Let me emphasize and expand on several things that Matt said, because I want to be certain that we understand the importance. He mentioned that in the previous year, we booked approximately $600,000 in revenue from Wirecard. And in this quarter, we had none from Wirecard. That is revenue that we had to make up in order to grow by 14%, which we did. As Matt said, 19% growth, you factor that in. Now, it's not okay to play with the numbers like I just did if, in fact, you lost the business. We often get asked by new potential investors to talk about customer losses or churn as is typically characterized. CoreCard has not experienced any customer losses that I can remember over the last 10 years where the customer decided to go to a competitor or or even go use their own internal software. Wirecard, for those who do not know the history, was a German public company that had been, I think, market-valued at $27 billion at its peak. It was called Europe's greatest fintech. They were a bank, and their primary business was on the acquiring segment of the payment space. They had licensed and were using our issuing software for the Middle East. It turned out that they were a house of cards. The major auto team firm had been hoodwinked, and they crashed into bankruptcy, and criminal charges were filed against the executives. And they're still prosecuting those cases. So we lost that business, which was actually extremely profitable, and it's slowly disappearing from our comparables. That also makes a green sky. Green Sky was and is a customer that's been acquired by Goldman Sachs. We believe the vertical portion of the business that they use CoreCard for will probably be discontinued, and that's just my best guess. So it's another hole that we'll need to fill to maintain growth. Fortunately, it's not nearly as large as the Wirecard business was, so it'll be easier to backfill and probably take a longer period for them to go from where they are to zero if and as they were to wind down. I guess the last one I'll mention is Cabbage. Cabbage was a very significant customer. And they sold their business for, I think, around $800 million to American Express. The legacy customers were not part of the sales, so we continued to service and receive income from the old cabbage. But eventually, that also is likely to go to zero. On the other hand, we've picked up American Express as a processing customer to process the small business offering, utilizing the customized software we developed for cabbage. I guess I probably should not have said customize. It's really the heavily parameterized standard core card offering that allows Amex to do things they cannot do easily with their own software. So when you ask us to tell you the customers we've lost, the message could get confused if we were to say we no longer service Wirecard, Green Sky, or Legacy Cabbage. While it may be true we did not lose the business due to a better offering, either internally or to a competitor. So we definitely lose no business to churn, but we do have to sometimes fill some revenue holes. I think I just wanted to clarify that because, you know, we talk about the business being sticky, and we believe it is really sticky. Another bad comment I want to expand on is the upcoming launch of a card with the American Express logo. You all know that American Express has built an issuer as a bike and a processor for the Amex card. They have what we call rails with merchants, similar to the rails of MasterCard and Visa. Historically, Amex was the only processor that could process the Amex card. But due to all the new fintech offerings, Amex does not want to be left behind, and they need processor partners that can meet the requirement of new innovative cards as well as respond quickly. We're all familiar with the Delta AMAX card. It is issued and processed by AMAX. But the cardless program that we'll be using for the AMAX card will be processed by CoreCard. We have several other programs lined up for going live either late this year or early next year. And a couple of those are on the AMAX with AMAX logo on them. All are small in the beginning and all hope to eventually be large. Some will successfully grow to large programs and some will not. None of us are smart enough to predict in advance which will be the big ones or which will not, so we take a calculated chance by investing resources to get them into the market. And we often remind the investment market that we took the chance with cabbage and it became one of our top three revenue generators in the past quarters. And we took a chance with a small company called Final which actually did not succeed as a card program, but was helpful in our eventual relationship with Goldman Sachs, which actually bought FILE. Another topic that's often tabled concerns naming or doing press releases on our customers. Since we believe it's up to our customer to tell the world what they want to tell them about their business and not up to us as their vendor, we generally don't do that. But we do make exceptions, either because we feel it's in our customer's best interest or maybe they want us to, or because of regulatory requirements. We've previously named Deserve as one of our best, and I will use the word esteemed, customers. Deserve serves as a program manager for several name card programs, and they use CoreCard as their primary credit processor. Deserve has many things CoreCard does not have, such as customer service, and they offer other services that compete with what we offer. but they're very good and very knowledgeable in the credit space, particularly in origination, and they provide great value in the card issuing chain. Together, we're pretty formidable as we can do the more complex credit offerings that many of their customers want. They're private, and at least before the general valuation meltdown, they had raised private capital from some of the more sophisticated investors as well as some other industry players at very high valuations. One of our other long-term licensees that I don't know that we've mentioned in the past, but I think it's okay to mention, is a New York company called PEX. It's P-E-X. Again, a well-run company that has a particular niche market in what I would call commercial hard light. Another licensee is, and you'll have to help me with this, Matt, Amerisor Bergen, who purchased one of our licensees. and now has a specialized pharmacy card. The company they purchased was our first licensee many years ago that's undergone full transitions before being purchased. I would have previously mentioned Gemini, which is one of our customers, and I guess after mentioning some of these customers, I can guess that I'll probably be asking future calls Well, how's the Gemini card going? Or how fast is the Carlos Amex card going? And I'll tell you, you can project my answer now. I'm not going to be talking about someone else's business growth. You need to ask them. We'll only talk about a rolled-up number, and we'll tell you what we expect in growth percentages for the group based on history of what we see happening, knowing some will undershoot and some will outperform, and hopefully we've averaged the number of our growth projections. For those uncomfortable with that, I think I can safely say that our rolling projections of the company's average growth rate each quarter for the past four years has been pretty reliable when you look at our projections. And I'll go back to one other area of Matt's comments, and that's gross margins. I stated in 2019 that I believe that our goal was to grow at a 20% to 25% average annual growth rate over the next five years. and I said we should do that while remaining nicely profitable. That continues to be our goal. Our operating margins lower the second quarter, and that's not a marker that one can use for future predictions. The margins will vary for many reasons, including the amount of license revenue recognized in a particular quarter, and also investments that we make for growth. There are companies in the fintech space that have prioritized top-line growth over profits, believing it's a land grab contest. Whether they are right or wrong can't really be determined at this point, but I believe the right answer is in the middle. Torquard has and will continue to balance top line growth with profitability. We believe that this is a better bet for shareholders, of which I happen to be a large one, rather than going all in for top line revenue growth. We could buy business and grow top line much faster, but we'd not be able to provide the premium service we currently provide our customers. So our focus will continue to be moderate, I guess moderate if you consider 20% to 25% moderate growth, and have reasonable profits that allow us to continue to invest to stay on the course. I know Matt earlier indicated we expect to grow at least 30% this year. I just don't want that to be the ongoing target. As part of that growth comes from a healthy license contribution, that I don't see repeating in the next couple of years. You notice I said next couple of years and didn't say it wouldn't happen again. We continue to expand on our very robust revolving credit software platform, and the potential for other very large licensees does loom in future years. At the present time, we have two focuses, continuing to grow our processing businesses and provide the very best services possible to our largest customers, and their processing customers, while simultaneously investing in developing the next core card platform for the future and expanding our trained employee talent base. I think let me stop there and just take any questions that we may have.

Thank you. If you would like to ask a question, please press star 1 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. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Mark Palmer with BTIG. Please proceed.