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spk01: 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.
spk03: 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.
spk00: 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?
spk03: So far through September, we've added 300, mostly in India.
spk00: So that's a 25% increase, 30% increase already this year. So I used the word caught up earlier, mainly to represent how we now feel that we have a stable environment for recruiting, onboarding, and training. All of this growth came with the dislocating factors brought on by COVID and also work from home. I'd say we're also caught up on stabilizing the environment from that perspective with our major current opportunity being facilities for the employment growth and dealing with the continued poaching of our trained employees by larger companies. I think I should pause and give the highest compliments and praise to the President, General Manager, Anna Popovic, of our India operations for his leadership through this growth. He's also one of the primary architects of our CoreCard platform and has just done a marvelous job. I guess some other facts that we shared with the board yesterday about our employees is that we have a large number of employees who have been with CoreCard for over five years, and actually many over 15 years. But the numbers for over five years are 200 plus in India, 20 in the US, and six in Romania. I will have to, both as a significant shareholder and also CEO, say I am very thankful for their loyalty and dedication to the success of the platform that they themselves built. Only a good team can make things happen, and perhaps of all the characteristics of an organization such as ours, teamwork is the most important. We just have a remarkable group of talent, energy, and longevity. With that background on expenses, margin, and employees, now what? Earlier I alluded to the fact that my prediction of 20% to 25% growth over any five-year horizon would be my expectation. How does that play into this year when Matt just said he expected growth this year to be in the range of 40%? Well, it really doesn't change my expectations. In addition to lumpy quarters, you'll get lumpy years because of the way license revenue is booked. I know some of you are probably tired of hearing the word lumpy, but it is what it is, and we make business decisions on what is best to grow the business, not in modeling it for Wall Street. We're still of the old Warren Buffett school, just mind the business. We run a business, not a business plan. I suspect that this year is our largest licensed revenue historically and perhaps will be our largest year ever. But when you have a year like that, you can expect that to be lumpy, and that poses issues in comparisons. There's a good chance that we'll get more license revenue in the fourth quarter, and if not, definitely in the first quarter of next year. I think you would understand if I said I hope it gets delayed in the first quarter, as our 2023 first quarter comparison will be against this year's very large first quarter of over $12 million. The comp will look bad either way. we're likely to hit $60 million in license revenue in 2022. And that's why I say it's probably the largest we've ever had and probably the largest we'll ever have. Of course, I wish some of the first quarter this year had come in the fourth quarter last year to smooth out our results and make Wall Street happier, but I think you know by now we've managed to longer term and take it as it comes. And shareholders who want steady growth over several years are comfortable with us as we have and will deliver Those kind of returns and those who want to manage the numbers for a chart are not going to be very happy. I can categorically state they will not be anywhere close to the $60 million license revenue in 2023. My best guess at this point is that it will be between $3 and let's say $7 million. Now that leaves a big top line in the earning holds field in 2023. in comparison to 2022. Remember, that license revenue all drops to the bottom line in terms of gross profit, or in terms of net profit, really. Can we fill that hole? Surprisingly, filling that hole is definitely possible, and possibly even to beat it, but that's not a prediction at this point in time. How do we do it if we do it? Well, currently, we have potential partners that may license or may want to be processed. If they license We get more up front. If they choose processing, we have more up front expense in infrastructure, and the monthly numbers just add up over time. We can't predict their choices at this time, so I cannot predict how they will play out. There's still another factor, and I know that because they told me they listened to these calls, and that's a company that we chose not to take on, is wondering why we did not take them on if we might have a revenue hold. The answer to that is that we continue to choose customers based on their strategic value to us over the long haul. We want to devote the scarce resources to the most profitable long-term value-creating opportunities. So do we have many or enough of those? I'm going to say yes, and that should be put in capital letters in the transcript. Matt talked about some of the newer customers. each with a particular value to us, and also the opportunities they bring to increase our processing revenues. There are others, in addition to those he talked about, that we expect to go live in the fourth and the first quarters. There are combinations of fintechs with particular needs, and large corporations are going to provide cards to their customer base. The large corporations almost always start small to test their offerings before large rollouts. It's the right way to do it. If they roll out faster than even I would recommend, they can fill that revenue and earnings hold fast. What about larger opportunities? We fully expect by this time next fall to have either announced or be working on one or two large programs. They'll either be direct core card or through current partners such as Goldman. or through new ones currently in discussion stages brought to us by other current program managers. We have sufficiently trained and skilled resources to take on two decent-sized prospects by this time next year, and probably enough for three or four good-sized prospects by late 2024. In terms of current discussions, there are a mix of licensees and processing potential customers. We're incurring the personnel expenses currently to be able to make that happen. Of course, in processing, we will still have to add more infrastructure costs to take that up. We can't take on three big ones successfully next year while still serving the strategic newer fintechs. And as I said before, we will not take on business that we have any questions as to our ability to successfully implement or serve. So don't expect more than two next year in some combination. Matt pointed out that our processing and maintenance revenues grew 52% in this quarter compared to last year, the same quarter. Now, I'm not going to project 50% each quarter, but I can comfortably say we'll have significant growth in this recurring revenue line next year, even though license revenues will be significantly down. For many shareholders, this is what they want to see. and they actually discount the license revenue income. I don't do that, but I know many do. Goldman Sachs is recognized in our filings as our largest customer, and the Goldman CEO has recently stated that their customer Apple has renewed their contract until the end of the decade. I expect the Goldman concentration to be coming down next year as we grow the other businesses. That does not mean we expect to lose Goldman Business, although I have said for some time, don't be surprised if they take a simple card program to a legacy processor in order to diversify their reliance on CoreCard. As their portfolios and card accounts grow, while we serve them well and they remain our number one priority for best resources, we do have growth challenges as they themselves also have. They are a great highly professional, highly talented organization, and our partnership has made CoreCard infinitely better as a result of that association. If they were to choose to bring another program onto the CoreCard platform, and if that program has a current base of cards that requires conversion, which by the way we're very good at, we would see more license revenues and perhaps maintain current professional service revenues at the current pace. If it were a new program, the license revenue would be more spread out with the program growth and we would see a dip in professional services. I might add that this fourth quarter with the holidays usually portends a dip in professional service work as you have fewer hours available since people take holidays. I think Goldman has stated in their own earnings calls that they want to take 2023 to stabilize their consumer offerings before growing them again. As I said earlier, we're planning on two larger customers by this time next year. Goldman may or may not be one of them, but we can only do two. I hope I've given you what you need to know as you make your ongoing investment decisions. We're conservative. because we want our customers to always be able to trust us. We're a company that believes in doing what's right regardless of the construct of the contract, and it's really not unusual for us to suggest before anyone else or the customer brings it up that our terms should be modified and even what the customer pays should be reduced. We also sometimes step up and may offer you the credits or benefits that we're not in any way contractually obligated to do if for some reason we have unilaterally messed up. We want to do what's right, even as we become much larger, and not hide behind process. Now, before you as shareholders get concerned with that statement, believing we're easy to roll over, you can just as easily find examples where we are tough as nails because we simply want to get paid for the good value that we provide. Pay us the right amount at the agreed upon time. We simply want to be known as 100% completely, totally trustworthy. and we want to be known as that by our actions and not by our slogans. Your choice, if you want to correlate that statement with the fact we still have no salespeople that I'm aware of than 1,200-plus employees. And by the way, I say that and end here with a smile as we open up for questions. Still no salespeople among the 1,200 employees, he said with a smile. Operator, you can open it up for questions if you'd like.
spk01: Thank you. We will now conduct a question and answer session. 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 2 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. Once again, that's star 1 to ask a question at this time. One moment while we pose for our first question. Once again, ladies and gentlemen, to ask a question at this time, that's star 1 on your telephone keypad.
spk00: Hey, we're happy if there are no questions because shareholders know they can always call Matt or I to get answers.
spk01: So if you don't have any at this point, why don't we just... We do have a question that just came through from Anja Soderstrom with Sedoti. Please proceed.
spk02: Hey, Leland. Hi, Matt.
spk01: Hey there.
spk02: I'm taking my question.
spk00: Uh-huh.
spk02: I'm... I'm just curious if you can talk to sort of the magnitude. You say you don't think you might lapse the license booking you had this year in the coming years, but you're talking about potentially two new customers, licensed customers at the end of next year. Can you just talk about sort of the magnitude of those? Are they...
spk00: going to be slowly building up because they are new customers or is it a transfer so it could be a little bit larger than just building up from scratch or it yeah right right now it's hard to know we're talking we are our partners are talking to something how portfolios that would be converted at the end of next year or the first of following that means it would be a big lump but we're also talking to those that are just going to build up over time and we're talking to some They're highly likely to have a license, but it will be smaller. It may even be international. So it's really hard for us to predict how we're going to fill that hole. I know you've got a model of this, and we'll try to help with what we know, but it's really difficult to know the combination. Matt, do you have any other comments on that?
spk03: I think your comments earlier about if it's a processing customer, it builds a little slower as they add accounts to the system. to the platform, if it's a licensed customer, you get that license revenue maybe more up front. A lot of that depends on timing, though, of a go live.
spk00: I think what she's asking, though, is how much of each are we going to have. I think what we're saying is we don't know right now. We just believe between the combinations of those that we're talking to that we'll fill that hole, or a large part of that hole, but we don't know whether it will be licensed or processing right now.
spk02: Okay, thank you. And then in terms of the license revenue you do expect in the fourth quarter, is that from both the GM and the Apple, or is it just one of them?
spk00: Well, we don't separate that. Remember, our customer is Goldman. It's not Apple or GM. So the license revenue would come from Goldman Sachs, not from... Just from growth and existing programs. So it could be any combination of that growth. We don't separate that.
spk02: Okay, got it. Thank you. That was all for me.
spk01: All right, thank you. There are no further questions in queue at this time. I would like to turn it back to management for closing comments.
spk00: Okay. Thank you, everyone, for your interest in the company, and we appreciate that interest. As usual, if you have any further questions that we'll be able to answer, please contact us directly. So thank you, everybody. Have a great, nice fall day.
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