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.

Now, of that $188,000, the majority of it is actually repaid to us by our customers, Goldman Sachs and others, and we simply use Nichols Collier both in our own environment as well as the other environments in order to get some efficiency at a cost. We could easily... go and get a third party just so we can beat the rule, but our costs would go up and I'm choosing to spend the shareholder money in the best way possible rather than worry about that particular formula. But it will cause a recommendation against a vote for whoever may be the chairman of the audit committee on any particular year. Hope that's helpful for some of you. With that, I'm going to open it up for questions. Don't really have a lot of other comments.

Thank you. Ladies and gentlemen, at this time, we'll be conducting a question and answer session. If you'd like to ask a question, you may 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 key. One moment while we poll for questions.

If there are no questions, I think we did have one sent in. Let me kind of rephrase it. They asked, are there any game changers coming up? And I think I answered that. Given the current environment and the banking environment, I'm not going to project any game changers coming up. We're going to continue to break my brick, building the company, staying profitable, and waiting the time out until some of this turmoil settles. Then we'll go back and look for the game changers. With that, I just want to thank you for your attention.

We do have a question. I'm sorry. Okay, go ahead. We have a question from Hal Gosich with B. Reilly. Please proceed with your question.

Hey, good morning, guys. I got a quick question on – first question is on expense growth. I think you mentioned you're going to hold employee count pretty steady after a big investment in headcount over the last year. I think – You ended the, I think your 10K said you ended with total employees around 1,200 when you filed it, and maybe it was 750 maybe 15 months ago. Do you think that this is a pretty good level of G&A spend and service spend in dollars for the rest of the year that we're seeing right now?

Well, I'm going to say on personnel in terms of headcount, it's going to remain pretty steady. I think inflationary costs, I don't know how to predict all of those yet, so there probably will be an increase just simply due to inflationary costs. But generally, spend is under control, and we'll be watching it. I'm going to even say more carefully than we have in the past, given the fact that we're holding a little bit right now. But personnel will pretty much stay stable. Stay in this neighborhood. It all depends on, you know, people we lose. We'll continue to hire, but you also always lose, and you may not get that ratio exactly right all the time. But it's going to be the, what do you think, Beth?

That's right. We should be able to stabilize hiring this year. You know, maybe there's a little bit of up and down, quarter to quarter, as Leland said. but kind of keep that steady and continue to grow revenues with the current level of Fed count that we have.

But the other expenses are mainly going to be whatever inflationary hits with us. There will be some increases in salaries, of course.

Okay. My next question is on maybe the mix of generally speaking of what are the kind of companies that you're courting right now for new card programs between international issuers Domestic issuers, large and small, and then emerging fintechs that are still growing accounts and want to add card programs. What's going to lay the land right now after Q1?

Yeah, it's a little of all of those. It's hard to put a percentage. There's going to be some international growth, we expect. It's not going to be huge, but there'll be some international. We continue to add emerging fintechs, and we're continuing to, we will add some folks who are, I'm not going to call them merge fintechs, but they may be starting newer programs, maybe some smaller. We do have some smaller banks that are going to continue to do some things, but the midsize regional banks are not going to do anything. So we're in conversations, but I'm just trying to give you my best guess of the lay of the land that it's not going to happen. I can't imagine them, despite the conversations, no matter how positive they are, I just can't imagine them wanting to get out in front of of regulators on any kind of risk whatsoever.

Okay. Okay. And if I ask one follow-up, you know, are you seeing issuers, you know, looking for differentiation in the marketplace by offering new types of cards like, you know, metal cards or economically eco cards or is there, are you seeing any?

Yes, it's not so much the physical card that we're seeing. We're seeing differentiation in terms of offerings, and mainly what we're seeing is that people want to be able to make changes to their program faster, and that's really hard to do with the large legacy processors, for good reason. So that's not to knock them, for good reason. They've got a lot of people on their system, and you've got to be very careful, and you've got to define it well in advance. So mainly what we're seeing is people want speed. As they see the market and the landscape change, they want to offer new things quickly. And in some cases, the bigger guys want to try out some things that they don't even know are going to be using or not, but they want to test them. So we're talking to the bigger guys mainly who say, we want to move quicker, we want to have more flexibility. In terms of the ongoing processing, it's fine. We're happy with what we're getting. We're really happy with the price we're getting. But we're stuck. We can't have the mobility we'd like to have. So that's kind of what we're hearing.

Okay. What's an example, last question for me, and then I'll stop. get back out of here, back in the queue if there's more questions. But what's kind of an example of a tactical change that your software allows you to make quickly? Is it like allowing a card to have maybe an installment loan on the same statement?

Well, that could be one, but you just might want to, I'm not going to say just interest rate, but you might want to, well, here's an example recently. where a commercial bank said that we want to issue a card that would let folks, if they pay it in seven days, there's no interest. If they pay it in 14 days, there's this much. And if it's 21, it's this much. If it's 30, it's this much. And if it goes over 30, we don't want to let them have any more credit. Now, you can take all of those parameters, but, boy, that's really hard when you start cascading the different interest rates. in a particular month, in a particular statement cycle, and make sure you get it right for the regulators. So that's just a little example.

Oh, that's pretty complex. Yeah, that's kind of off on the blind steam.

We could do that, and we could do it pretty fast. We could set up a sample program. They could do that and test it in a week or two, where it's going to take months to do it somewhere else. So it really is more of a state of mind, I think, where... The larger guys know that they're hung, so they don't need any innovative thinkers about how we could change our program, what we could do with our customers, because they can't do it quickly anyway. So they're not all sitting there, well, we've got 100 ideas, but they're sitting there saying, well, we've had ideas and we couldn't implement them. What would happen if we come with you? How fast can we implement them?

Excellent. Thank you.

Our next question comes from the line of Kadir Richie with Richie Capital Group. Please proceed with your question.

Hi. Good morning, gentlemen. Thanks for taking my question. Morning. I wanted to see if you could give us a bit more insights on the type of upgrades you're, you know, making to your software, you know, to the extent that you can talk about it. What's the high level strategic evolution strategy? And then I'd also really like to get your thoughts on the evolving ecosystem within card processing and, you know, where do you see the market going and what gets you excited as far as future core card opportunities?

Sure. In terms of what we're doing in terms of, I don't know who would call it a rewrite, a new version, but it's written. What we're doing is coming from a blank sheet of paper. It's not using what we have other than business experience. So it uses all the latest technologies that are in place now. including anticipating things that are being talked about. You can even talk about AI with that. But the idea is that you want to make sure you have the latest and greatest software out there three years from now, three to ten years from now, to do what may happen. And that ties into your next question. Oh, let me add one more, then I'll tie it in. Another thing is, obviously, when most of us wrote our software originally, yeah, the cloud was around, and yeah, we made it work on the cloud, but we didn't have full understanding of the implications of how many data centers will be out there. How do you do this internationally? How do you go across different time zones? How do you settle throughout the world internationally the way money is moving now? So we've taken everything that we know and what we're projecting, and that's where I'm going next, in terms of writing new software. So in terms of where I see the landscape, And I'm talking about several years out. Now, right now, instead of dividing what's in your wallet into a bunch of different pockets, it's really just money. And whether it's in a savings account or whether it's on a credit card or whether it's on what we'll call a buy-now-pay-later or whether it's on an installment or wherever it is, it's just money in your wallet. And then there's decisions made about how best to utilize that. Now, I guess go back to what I just said a while ago. I said now Apple's buy now, pay later is not really in what I'm going to call our wallet. It's in, well, I mean, it's all their wallet, but it's not all on the same account that we're keeping for the credit card. What our vision in the future is all of these things are going to be on one account, and it's just money. So we're trying to build a system that will put all of this in one account and then wallets will determine how it gets, uh, how it gets distributed. That's a very high level.

Okay. And then just one, one follow up, you know, with the legacy processors, you know, that haven't been as aggressive about making these, this, this evolution and evolving with the market. Like, where do you, where do you feel like they'll stumble?

It little by little they're not going to really stumble. It's just going to be a slow erosion from From what they're doing now, so I don't see any tipping points I see erosion and and look at what they're doing now You can you can see that look at the reorgs that they're all trying to do the big guys you know getting rid of global global place putting back up get rid of world pay and um so i just see this as stumbles many of those stumbles will be covered by reorgs which often happens or acquisitions but nevertheless when you look through it they're just stumbles okay thank you our next question comes from the line of av fisher with long cast advisors please proceed with your question hi thank you hi leland hi matt i had i had two quick questions the first one

you know i'm bad at math and i'm wondering if you could help me with it so you you guys did roughly 70 million in sales last year and you're guiding to 10 top line growth which gets to 77. you're guiding to license of three to seven so at the high end of that services 10 services growth we've said we've said for a year we're not going to be able to add back all of that license revenue this year Right. So you're talking about 10% growth on the services side. Yeah. So 54 plus five gets to 60 ish. Right. And, and thank you for the clarification. And just to layer on top of that, Goldman's roughly flat. So that entirety of that 10% growth is roughly incremental, like new customers coming on board.

Roughly. I mean, there's going to be some increase on, Well, we don't know.

You have to look at the components of the revenues there. So you've got the decline in license revenue from $16.1 million to $3 to $7 million. That's Goldman related. And then so you're going to see some services growth, you know, from Goldman, but then also.

But most of it's from new customers.

Right. That's right.

So do you get some scale in that and therefore some, you know, sort of leverage on the margin there? Up from where you were at 34% on the services side this quarter.

Well, we do expect as we stabilize our head count and just kind of look at all of our costs and continue to grow revenues, we should see some leverage on the services margin in 2023.

Got it. Okay. And then the second quick question is you've invested in the Middle East. You've talked about investments in the Middle East. Revenue has grown there year over year, but it's still fairly small. And I just wondered if you could talk a little bit about sort of where that business could go, where it is relative to your expectations.

We expect it to continue to grow. It's going to be small, but it's continuing to grow. We've got some new things planned for this year.

All right. Thank you.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Well, again, thank you for both your questions and for your time. Always, if you have further questions, Matt and I are available to try to answer those. But, again, thank you for your continued ownership of the company. We'll continue to try to be good stewards of that trust you placed in us. So thank you.