CoreCard Corporation

Greetings, and welcome to the Call Card Q3 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during a 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, CFO. Thank you. You may begin.

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 2021 Form 10-K and subsequent filings. As we noted in our press release, our third quarter results were in line with our expectations. Total revenue for the third quarter of 2022 was $14.5 million, a 12% increase compared to the third quarter of 2021. The components of our revenue for the third quarter consisted of professional services revenue of $7.8 million, an increase of 12%, processing and maintenance revenue of $5.3 million, an increase of 52%, and third-party revenue of $1.4 million. Services revenue, which represents total revenue less license revenue, grew 30% for the third quarter of 2022 compared to the third quarter of 2021, led by 52% growth in our processing and maintenance revenues. We continue to onboard new customers both directly and through various partnerships we have with program managers such as Deserve, Vervant, and Cardless. 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 and Simon, which is a real estate investment trust that owns shopping, dining, entertainment, and mixed-use properties and is an S&P 100 company. 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 completed the American Express certification process in October, and we expect this program to be live later this month. We were happy to have recently announced the addition of Catherine Petralia to our board of directors. Catherine brings extensive FinTech experience to our board and was a co-founder of Cabbage, a customer that we've talked about previously and that was acquired by American Express in 2021. We recently finalized a new contract with American Express to process its Amex Cabbage loans and have seen steady growth in this new program. Separately, we continue to service legacy cabbage loans under the case servicing name. As discussed previously, these legacy and PPP loans continue to run off as the loans are paid off or forgiven. We recognized revenues of approximately $0.5 million for the third quarter from this customer and expect the runoff to continue at a faster pace going forward as case servicing announced its intentions to wind down. I'll now dive deeper into the results for the quarter. Processing and maintenance revenues grew 52%, as I mentioned, in the third quarter of 2022 compared to the third quarter of 2021 from the recently added customers mentioned above who are now live and continued growth from existing customers. Revenue growth, excluding our largest customer, was 22% in the third quarter of 2022 compared to the third quarter of 2021. As a reminder, we typically charge for our services based on the number of accounts on file, not transaction volume. As a result, we expect our processing revenues to be resilient during weak periods of economic growth or during economic declines. Turning now to license revenue, as expected, we did not recognize any license revenue in the third quarter of 2022. However, we do expect a new license tier in the fourth quarter of 2022. Professional services Revenue remains strong in the third quarter. We anticipate professional services revenue in the fourth 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, and we could still have both positive and negative surprises from what we expect, although we don't anticipate any large surprises either way. Turning to some additional highlights on our income statement for the third quarter of 2022, income from operations was $1.7 million for the third quarter of 2022 compared to income from operations of $3.3 million for the same time last year. The decline primarily relates to lower license revenue in the 2022 period. As we've said previously, our license revenue is lumpy and can have a significant impact on our results. Our operating margin for the third quarter of 2022 was 12% compared to an operating margin of 26% 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 third quarter 2022 tax rate was 24.6% compared to 26.3% in the third quarter of 2021. Earnings per diluted share for the quarter was $0.16 compared to $0.29 for Q3 2021. We remain 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 through the third quarter of 2022, we're confident in top-line growth expectations of at least 40% for fiscal 2022 compared to our previously provided guidance of at least 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. It's a beautiful polar day in Atlanta with the leaves turning both on the tree and on the ground. A lot of color. So let me add a little color here about what Matt said about the company. By the way, I hope it's beautiful where you are, too, and have the same smile we do as we look out on this beautiful weather. I'll give you some of my views on the quarter and 2022 year-to-date, as well as opine on what I expect for this quarter and some for next year. My comments really should not be interpreted as any kind of formal guidance, as I'm speculating on how things will unfold from where I sit today, and they always can look different tomorrow. As I said, the weather looks great today. It may not be the same tomorrow. Matt gave you the highlights of the quarter. Maybe my first comment will be what we could call lowlights, and then I'll move on to the highlight callers. And I would say the low light would probably be considered the expense growth and what may appear to be margin issues. There's no question our expenses have continued to grow, and they grow actually at a faster rate compared to our non-licensed revenue. Most of that growth was planned, and it's all in cost to people. Salary inflation is tipped above what we will expect long term. But I really don't expect it to moderate until perhaps the middle of next year. We are intentionally bringing on more people to be ready for more growth in the coming years. You've heard me in the past talk about how long it takes to train to be able to offer our customers and partners the quality, high-end expertise that differentiates us from others. For some specialties, 18 months of training suffices. But for others, it'll be a three-year process. We've now caught up in the sense we have a steady process that will enable us to grow at the steady 20% to 25% rate that I've regularly stated that should be a practical limit for a responsible fintech company. By the way, when I say 20%, 25%, I would say over any five-year period, that should be our annual growth. There'll be ups and downs, and I'll add just as quickly that that 2024 is not likely to grow by that point and more on that comment later. Let me expand on the employee topic a bit more. We now have over 1,200 employees. I think this month, four years ago, we had about 430 employees. So we tripled the number, moving at a very rapid pace. How many did we add this past year, roughly?