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 with the SEC, including our 2022 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 2023 was $15.7 million, a 3 percent increase compared to the second quarter of 2022. The components of our revenue for the second quarter consisted of license revenue of $1.8 million, professional services revenue of $7.4 million, processing and maintenance revenue of $5.7 million, an increase of 26 percent, and third-party revenue of $0.9 million. We did experience a decline in third-party revenues as our customers utilized fewer ancillary services on a year-over-year basis. Customers can perform these services themselves, contracts through third parties, or we can provide these services through our direct contracts with third parties. Services include items such as customer service, statement printing, card production, network fees, and compliance costs. We would like to reiterate that third-party revenues are lower margin compared to our other revenue streams, and so there is less of an impact at the bottom line. As noted in our 8 filing last week, we signed an amendment with Goldman Sachs that, among other things, converts managed services revenue, which is a portion of our professional services revenue, from a time and materials basis to a fixed monthly fee of $1 million. we recognize the slightly higher monthly amount from this revenue stream for the first six months of 2023. While the partial conversion to a recurring revenue structure is beneficial from a visibility perspective, it will result in lower services revenue for the remainder of the year. As a result, and combined with lower than expected third-party revenue, we have adjusted our guidance for the year to approximately 5% for services revenue growth. Revenue growth, excluding our largest customer, was 7% in the second quarter on a year-over-year basis. The slowdown from the first quarter is primarily due to lower third-party revenues, as discussed previously. We continue to onboard new customers both directly and through various partnerships we have with program managers, including programs with American Express as the network. As in previous quarters, we currently have multiple implementations in progress with new customers we expect to go live in the coming months. Processing and maintenance revenues grew 26% in the second quarter of 2023 compared to the second quarter of 2022 from the recently added customers mentioned above who are now live and continued growth from existing customers. And now turning to license revenue, we recognize another license tier in the second quarter of 2023 as expected. resulting in $1.8 million of license revenue for the second quarter. We expect a new license tier in the third quarter of 2023. Professional services revenue will remain strong in the second quarter. We anticipate professional services revenue in the third quarter in the range of $6.7 to $7 million. And now turning to some additional highlights on our income statement for the second quarter of 2023. Income from operations was $2.7 million for the second quarter of 2023 compared to income from operations of $3.5 million for the same time last year. Our operating margin for the second quarter of 2023 was 17% compared to an operating margin of 23% for the same time last year. The decrease is primarily driven by hiring in India and in our Columbia office that we opened in October 2021, in addition to continued infrastructure investments in our processing environment. Our second quarter tax rate was 24.8% compared to 23.9% in the second quarter of 2022. Earnings for diluted share for the quarter was 22 cents compared to 33 cents for Q2 2022. As noted in our press release this morning, for the full year, we expect growth in services revenue of approximately 5% 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 11%. We expect license revenue in the third quarter. However, it's difficult for us to predict the timing of license revenue for the fourth quarter and beyond 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 continue to be strong in the first and second quarters, and we anticipate professional services revenue in the third quarter of 2023 to be likely in the range of $6.7 to $7 million. The lower professional services revenue reflects the change to our Goldman contract, converting a portion of the revenue to a fixed monthly fee. With that, I'll turn it over to Leland.

Okay, thanks, Matt. I think you covered all the essential financial things, and I'm going to talk about a few things in unprepared remarks, but just things that people have been asking us. Let me just first comment on the fact that you talked about India being part of the reason for the difference between last year and this year. I can say at this point, we have pretty much flattened the growth in the India operation based on slower growth here. We have slightly under 1100 employees as of the end of this quarter. and that counts the contractors that we also use full-time. I would say our full-time staff is probably about a thousand employees. We probably have about 80 contractors, most of which are full-time for us, not all. And then we have maybe 20, 25 interns at the present time. So in reaction to a little bit slower growth, we have taken the step of slowing things down there. Now, also, we are continuing to spend money in two areas. One, the Tesla project that we call it the Tesla project, which is the new core car software that's still perhaps two years out. Hopefully, it'll be less time than that, and we're certainly going to be using some modules that we're developing in less time. In fact, we'll be putting one of those in this year. We're going to continue to spend in that way. But the big question that I'm always asked is what about Goldman and Apple and where do you stand based on what they've been saying? There is some press recently that talked about Goldman is talking to America's press about taking the Apple account. I think the president of Goldman said it right when he said the GM and Apple relationship is not unilateral. I interpret that to mean that Goldman can't do whatever they want to with those relationships without getting complete buy-in from those two parties. I must say, in the beginning, I know nothing. As you would expect, Goldman is very quiet in terms of how they deal with these things and the people we deal with. Not only will they not tell us, but the fact is they know nothing because it's really just It's really handled at the very top. So everything I say now is just speculation based on my relationship and the amount of time we spent with them and also knowing about what we do and about our software. So here's what I would speculate. Well, let me back off. There's one place that I won't have to speculate. You note we filed an 8K, I guess a week or so ago, that said that Goldman and CoreCard had... had an amendment to their agreement so we extended all of our contracts for two years. So that will give you some indication of the relationship we have. Part of that moved some of our revenue that was on time and materials to fixed price and as Matt said that's probably going to result in a little less income to us over time but we felt like that was the right thing to do to have a two-year contract and have recurring revenue. In terms of a two-year contract, it's my opinion, and I think anybody's opinion, that it would take more than two years from the time you said, okay, we're going to move this contract somewhere else to another party off of your card. So I am very, very, very comfortable that we'll be processing the Apple card two years from now. Of course, it can be moved, and of course, you need to do what you need to do to keep the business, but we're doing it very well. We just had a very successful end-of-month, end-of-quarter processing of the Apple Card, faster than what's ever been processed before, so we're very happy with performance. And likewise, with the contract renewal for two more years, we also feel very comfortable with that. Now, one thing to think about on that contract has nothing to do with really blasting the software. It's perpetual license. And as long as they add new cards, they're gonna have to pay us. So it's kind of unlimited in that sense. But in terms of just the normal things we do for them, it's now a two-year agreement. So what does that mean? Will they move it? It's possible. It's highly unlikely, but it's possible. And if they do move it, what happens then? Well, it's possible that a new provider will still want CoraCard to process the card. Now, there are a lot of things you do outside of processing. In fact, these are the areas that Goldman had problems with, and that's your customer service, that's disputes, basically dealing with the customer, dealing with some regulatory issues. It was not a problem with the processing that we were taking care of for them. Goldman had never done that before, by the way. So if you go to someone new, such as American Express, they do that all the time. They would know how to do that, as well as a lot of other people discovered, a lot of folks. In fact, there are some rumors that Apple might choose a bank that basically had no name bank and not put their name in big letters on the card. And then Apple would take on some of that third-party stuff. Again, I believe we would be the processor for part of that. But other people clearly could do the customer service and the dispute, and that type of thing may be better. So that's where we stand on that. We don't believe there's a risk on that as long as we do what we're supposed to do and as long as we do a good job for it. We don't believe there's a risk. We believe we've priced it right. We believe that we provide very, very good service. So we don't see a problem with that. That's usually what people call about. Everybody's worried about what the press says. And I would say the next thing, obviously, growth has slowed. We're seeing big, medium-sized banks. We don't deal with the big banks right now, but the medium-sized banks are really saying we don't want anything that would get our name in the headlines. We don't want to announce a change of processors. We don't want to do anything that simply would be a bill that would cause people to take a hard look at us. So a lot of that conversation has really just been put on hold. We still have a good number of customers that are beat up. They could go by at any point, but likewise, some of them are just kind of putting things on hold as the current financial economic situation kicks out. One thing we are doing that's new is that we're developing a commercial card for a mid-sized bank. So I went out and said things are pretty much on hold, but there's this one situation where we're developing to their special, well, I won't say to their specification, but with their help, we're developing a new commercial product that will go live for what we call friends and family in the fourth quarter. And that simply means it'll be in test, it'll be used lightly. It would be rolled out in first quarter of next year. I don't expect huge revenue from that initially. We think it's a very important product for us, particularly the fact that it's being developed hand-in-hand with the bank as opposed to just someone coming out with product specifications. And we believe it does have really good possibilities both for that good-sized bank as well as others in the future. So we're doing a lot of new stuff. We still have new clients coming in. They're just not getting to market as fast as we would hope they'd get to market. Matt, any other comments that you hear from folks? Those are the main ones that I hear that I wanted to respond to.

Yeah, I think that covers it. The only thing I would add is that there were three contracts that were extended with Goldman. Two of those were for statements of work that we have with them, and that was a two-year extension. And then for the maintenance work that we do, that was a three-year extension. That's the only thing I would add.

Okay. So let's take it to questions now. If we have any questions, as we always say, if you don't want to ask the questions here on the call, we're always open to explain whatever maybe we haven't explained that well. So operator, let's see if there are any questions for us.

Great. 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 2 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 Hal Ghosh with B Riley Securities. Please proceed.

Hey, thanks. Thanks, guys, for all the color. My question is expense growth. You've had a good overview of the employee count

also like you know point out like you had a lot of employee growth in the last you know two years or so do you think your expense growth here is going to be leveling out um and in the next you know year to two years thanks yeah yeah i do i i think uh there's going to be some inflation impact obviously to payroll the expenses but in terms of overall growth we're not going to need to grow that a lot to take on a good bit more business uh we're going to need actually fewer people working on the Goldman Apple thing, because that's running pretty smoothly. So we think we're in pretty good shape to take on more business without adding a lot. Matt, you want to add anything to that?

No, that's right. There'll be some smaller increases. But overall, we're trying to keep the headcount pretty steady. And that's what we've been doing in India and kind of only adding where we need to. But we added enough people last year to where our focus is on getting those folks trained so they can contribute.

Okay, great. If I could ask one follow-up. Leland, you mentioned the banks don't want to do anything that gets their names in the papers, and basically it seems to me they want to keep their risk profiles low. And what should we be looking for as analysts and investors to know when that modest overhang is lifting? What will we see in the economy? What will we see in the regulatory picture based on your experience? What should we be looking for? Thank you.

Well, that's a good question. I need to think about that one a little bit. It's, hmm, from an overall economic standpoint, I just think you need to, we need the overhang that we're getting here with Fitch hitting the credit of the U.S. yesterday and with all, I guess the market's down, S&P, the Russell's down almost 2%, S&P down close to 1.5% today. You don't need to see growth. You need to see some stability. It's both political and economic, just some stability so people can just say, let's just get back to business as usual. Nobody feels like it's business as usual right now.

Yeah. Thanks. I would agree with that. I mean, there's many, many small banks that are selling consumer products credit portfolios to non-bank financials to improve their ratios. So what you're saying makes perfect sense to me. Thanks for your call. I'll get back in the queue. Thanks.

As a reminder, this is Star 1 on your telephone keypad. If you would like to ask a question, we will just pause for a brief moment to see if there's any final questions. There are no more questions at this time. I would like to turn it back over to management for any closing remarks.

All right. Well, we just thank you for your continued interest and support. We're going to continue to push forward. We feel pretty comfortable about where we are. We think we're moving fast at this point, but we think we're on the right path and we'll continue. So thank you. And if any other questions along the way, please give us a call. Thank you very much. Have a great day. Bye.