CoreCard Corporation

Good morning, everyone. With me on the call today is Leland Strange, Chairman and CEO of Corecar 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 Corecar 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 with the SEC, including our 2022 Form 10-K and subsequent filings. As we noted in our press release, our strong performance continued in the first quarter of 2023, and we are pleased with our services revenue growth of 25% on a year-over-year basis. The components of our revenue for the first quarter consists of the professional services revenue of $8.3 million, processing and maintenance revenue of $4 million and third-party revenue of $1 million. As expected, we did not have any license revenue for the quarter. Total revenue for the first quarter was $14.8 million, a 39% decrease year-over-year driven by decline in license revenue from $12.5 million in Q1 2022 related to the conversion of the General Motors portfolio compared to zero license revenue in the first quarter of 2023, which again was expected. Services revenue, defined as total revenue less license revenue, grew 25% in the quarter on a year-over-year basis. Within services, processing and maintenance revenues grew 34% in the first quarter on a year-over-year basis, and professional services revenue grew 27% on a year-over-year basis. Revenue growth, excluding our largest customer, was 23% in the first quarter on a year-over-year basis, excluding revenues from both Goldman and GreenSky, an acquisition that Goldman completed in March 2022. We continue to onboard new customers both directly and through various partnerships we have with program managers such as Deserve, Vervet, and Cardless. As in previous quarters, we currently have multiple implementations in progress with new customers we expect to go live in the coming months. Turning to some additional highlights on our income statement for the first quarter of 2023, income from operations was $1.8 million compared to $11.8 million for the same period last year. Our operating margin was 12% compared to an operating margin of 48% for the same period last year. Year-over-year decline in our operating margin was primarily driven by previously mentioned lower license revenue and 2022 hiring in India. Our headcount was mostly flat from year end and we expect to stabilize our headcount in 2023 as we continue to grow our revenues without adding a significant number of new people. Our Q1 2023 tax rate was 24.7% compared to 25.8%. In Q1 2022, we expect our ongoing tax rate to be between 25 and 27%. Earnings per diluted share for the quarter was 15 cents compared to a dollar for Q1 2022. As noted in our press release this morning, for full year 2023, we expect growth in services revenue of approximately 10% and license revenue to be between $3 million and $7 million. We expect growth from customers excluding our largest customer, which is all services revenue, to be approximately 20%. We expect license revenue in future quarters in 2023, starting in the second quarter, However, it's difficult for us to predict the timing of license revenue for Q3 and Q4 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 quarter, and we anticipate professional services revenue in the second quarter of 2023 to be likely in the range of $7.2 to $7.4 million. We're expecting some slowdown in the growth of professional services for the rest of 2023. However, we expect that revenue stream to remain at a high level. And with that, I'll turn it over to Leland.

Okay, thanks, Matt. This is a quarter where I'm going to have very little to add to Matt's comments. The quarter was actually stronger than we had anticipated, even what we had anticipated at the beginning of the quarter. But I don't want to read too much into that as Matt said we're going to be cautious for the rest of the year. All of our customers are carefully watching their spend, as we are. We had previously, even a year ago, said the year-to-year overall comparison would not be good, as we had a very large record license revenue in the 2022 quarter that was not repeatable. From an overall business perspective, we continue to bring on new clients, albeit smaller ones, all of whom hope to grow to be large in the future. Every quarter we have new customers going live with new offerings. The likelihood of a big name or a big conversion is not as strong today as it was even six months ago due to the turmoil of the banking sector. We're still having those conversations, but I have to believe the risk appetite for banks has greatly diminished, and they'll generally prefer to just remain under the radar. We'll see how well that lasts. No one knows the outcome as the regional banks now are really under the gun, even today as we speak. We've seen stock prices for a couple of the major regional banks go down 20%, 30%. So that does impact us. We do have a smaller bank that will be going live this year for sure. We may have two, but I don't have anything big right now as folks are just talking and saying we're waiting to see how things develop. I'm going to I got an email yesterday with some questions from a shareholder. I thought I'd share my answers that I gave him with you, and then I'm going to comment on the ISS vote recommendations, which will conclude my comments before we have open air for questions. So one of our shareholders sent Matt an email yesterday, the day before, and said, well, there's not many questions being asked on the call, so would you guys be willing to answer this? I've seen the answers, so here are the questions. Does the Apple savings option involve the use of Core Card software? And if so, what impact is there for Core Card? I answered that by saying the Apple credit card is used for info gathering, but not directly involved in the savings option. You do have to have a credit card to get the savings account, so that helps to increase the number of cards and Core Card benefits with more cards. I will add, of course, they're offering 4.15% savings, so that definitely is causing more cards to be added as people want to grab that savings at Goldman. Second question, which does the Apple BNPL option involve the use of CoreCard software? And if so, what impact is there for CoreCard? I answered similarly above. CoreCard is not directly involved with Buy Now, Pay Later for Apple. Now, the next question is a tough one, but I'm going to go ahead and read it. So, what percentage of the software engineers hired in the past 12 months are working and such that they are directly contributing to the net profits of CoreCard. I think the question was really, you're still hiring, or the people that you're hiring are making money. So my answer was, this is unanswerable, as engineers are hired for a variety of tasks, and we do not separate engineers that are directly in revenue-producing tasks. For example, a licensed customer pays us maintenance as a percent of the license, and some engineers are working on things that have immediate impact, and others on longer term projects that will benefit the lives of the other maintenance. And then two more questions. One is, how much of CoreCard's free cash flow is being used to develop the upgraded software? And when do you expect the upgrade to be significantly completed? My answer, you don't separate the income streams in the free cash flow. So again, not answerable. Software in this business is never complete. We'll be using some of the new software this year, but it'll be at least two more and maybe three years to fully have a new version. And finally, the last question was, how much benefit would the upgraded software be to attracting new business or creating a significant competitive advantage for Core Card over its competition? My answer, management believes the new software is required to be competitive three plus years out, even though the older software will still be used. The new software should have lower operating costs, which will be advantageous in bidding for new business. There are no silver bullets that will provide significant competitive advantage as decisions are made, not only on functionality and features, but also pricing. So I got a response to my answers, which, let me see if I can find that, which I thought was surprising. He said, and I won't give you his name, he said, thanks for taking the time to answer my question. I appreciate your straightforward candor and your shareholder's letter stating that you're building the company brick by brick. Then he said, INS was the first stock I bought when I moved to Atlanta, now get this, around 43 years ago. I look forward to the conference call. So thank you for the questions, and I will also say thank you to many of our long, long-term shareholders. I think we're very unusual in the sense that we have a bunch who have really stayed around for a long time. My next comment is going to be about ISS. As the institutions know, but all shareholders may not know, the ISS actually sends out recommendations to institutions on how they should vote at the company's corporate annual meetings. Last year, and also this year, they recommended that the institutions vote against the chairman of the audit committee. It's simply because the ratio of audit to non-audit fees is higher than a certain minimum. Now, it's good policy, frankly, to keep audits separated from consulting fees to make sure you don't taint your auditors. And we totally and completely agree with that. In our case, it's somewhat different. And Matt may weigh in on here. Just to give you an idea, this past year, our audit fees were $112,000. But the other fees that were billed were, let me see, 188,000. So audit, 112. Other fees, 188. That means the ratio is greater than 50-50, which is kind of their minimum cutoff in terms of their formulas. The reason we have 188 in other fees, though, is because of SOC compliance that's required for companies that are in processing services. These are not consulting services, and Matt, help me out here, but they're totally independent.

They require our auditor to be independent, and so if they're not independent for those services, they wouldn't be able to provide them, similar to the way they need to be independent in providing audit services. So we kind of view those in a similar way. although they do fall under the non-audit services bucket for purposes of the proxy statement, and ISS looks at that as just non-audit fees and then calculates the ratio, as Lewin said.