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's 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 at the SEC, including our 2022 Form 10-K and subsequent filings. As we noted in our press release, our third quarter results were in line with our expectations with continued sequential and year-over-year growth in processing and maintenance revenue. Total revenue for the third quarter of 2023 was $13.4 million. a 7% decrease compared to the third quarter of 2022. The components of our revenue for the third quarter consisted of professional services revenue of $6.4 million, processing and maintenance revenue of $5.8 million, a year-over-year increase of 10%, and third-party revenue of $1.2 million. The 10% year-over-year growth in processing and maintenance revenue was driven primarily from recently added customers who are now live and continued growth from existing customers. That growth was offset by a decline in professional services revenue due to lower demand for development personnel from Goldman. We did not recognize any license revenue in the third quarter of 2023. Our best estimate on the timing of the next license tier is sometime in the first half of 2024. We continue to see nice growth from all customers, excluding Goldman, which was 18% in the third quarter on a year-over-year basis. This growth has come through continued onboarding of new customers both directly and through various partnerships we have with program managers. As in previous quarters, we currently have multiple implementations in progress with new customers that we expect to go live in the coming months. Turning to some additional highlights for the third quarter of 2023, income from operations was $0.4 million for the third quarter of 2023. compared to income from operations of $1.7 million for the same time last year. Our operating margin for the third quarter of 2023 was 3% compared to an operating margin of 12% for the same time last year. The decrease is primarily driven by lower revenue and higher costs from hiring in India and in our Columbia office that we opened in October 2021, in addition to continued infrastructure investments in our processing environment. As discussed previously, we are working on the development of a new platform. A portion of the costs associated with this project are capitalized. Anything not capitalizable under the accounting rules is expensed to development costs. We have incurred pre-tax development expenses of $1.2 million through the first nine months of 2023 and $0.5 million in the third quarter of 2023 related to this project. Our third quarter 2023 tax rate was 24.5% compared to 24.6% in the third quarter of 2022. Earnings per diluted share for the quarter was a loss of 3 cents compared to income of 16 cents for the third quarter of 2022. And adjusted earnings per diluted share was 9 cents for the third quarter of 2023 compared to 16 cents for the third quarter of 2022. And that adjustment excludes the impact of an impairment on a cost method investment that we recorded in the third quarter of 2023. Our operating cash flow for the year through September 30, 2023 was $18.3 million compared to $10.9 million for the 2022 period. We plan to use this cash for future growth, potential acquisitions, and share repurchases. As noted in our press release this morning, for the full year 2023, we expect growth in services revenue to be approximately flat in 2023 compared to 2022. The impact to revenue in the fourth quarter are primarily driven by lower expected professional services revenue from Goldman and by the loss of a customer in the parking app space. This customer, Park Mobile, was acquired by a larger competitor recently and has now been fully integrated into their parent company. We were the program manager for this customer and therefore recorded the interchange revenue generated from their program as gross revenue and any related costs as cost of services. We generated approximately $40,000 to $45,000 of processing revenue and approximately $0.5 million of third-party revenues and costs on a quarterly basis from this customer. We do not expect any related revenues or costs from this customer in the fourth quarter of 2023 or future periods. We continue to expect strong growth in processing and maintenance as our customers continue to grow and as we continue to onboard new customers. We anticipate professional services revenue in the fourth quarter of 2023 to be in the range of $6 to $6.4 million. The lower expected professional services revenue reflects the change to our Goldman contract, converting a portion of the revenue to a fixed monthly fee and lower development professional services from Goldman. As a reminder, we converted the managed services revenue we received from Goldman to a fixed monthly fee of approximately $1 million, slightly lower than the run rate 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. With that, I'll turn it over to Leland.

Okay, thanks, Matt. probably emphasize a couple of things Matt said and then probably turn it over to Quashie because there's not a lot of new things to talk about. Investors wanted us to lower the concentration of our largest customer and we did it but not the way I would like. I always said let's lower it by keeping the revenue we have from them and growing other revenues. Well, we did grow other revenues and that's Again, I've said several times that's the way you ought to look at the company. Are we growing the other revenues? If we stop growing those, then there are problems. If we keep growing those, then we've got a great future long term. The Goldman cutback in professional services was simply a part of their cost cutting. If you listen to their earnings call, they've made it very clear they're going to try very, very hard to get the platform solutions division profitable and quit losing money, and they've just dictated all the way down, just cut expenses everywhere you can. So we ended up with a part of that. We do have that longer-term, well, two- or three-year contract for a million a month for many services, but professional services are bearable, and they can ramp those up or they can cut those back as they wish, and apparently those are going to get cut back. We're not immune to what happens in the environment, both at Goldman as well as fintech generally. And I would say that the private fintech market might be ripe for a shakeout. And I think we're in a good position to look at some of that. We're good in the sense that we've got almost 32 million in cash. The cash flow is bad. So we'll continue pretty much doing what we're doing, which is growing our processing business outside of the Goldman outside the Goldman business. I guess just mention we have bought back up I think a million and a half dollars worth of stock in the first nine months. If we had known what was going to happen with the Goldman Professional Services, we would have been better stock pickers and probably wouldn't have bought it back at some of the prices in the mid-20s that we bought it at. We may be back in the market in the next in the month of December if the stock takes a big hit due to this, because we're very comfortable with our long-term outlook. We just have to settle through the Goldman issues here, and then we'll continue what we're doing. Again, don't have a lot of additional comments. I think Matt covered about everything. Maybe I will focus on one thing. He mentioned that we had third-party revenue, I think he said about $1.3 million from part mobile, and that is going away completely. That was very, very little profit, but GAAP accounting requires us to put that on the top line as revenue. It's a program we entered into many years ago, and we knew it was not going to be highly profitable, but we wanted to do it to expand our services. So that goes away, not because they left us, because they didn't like us, but they were bought by a much bigger company who has the ability to take care of This little part of what they were doing with us that they couldn't have done with their own platform in the past. So that will be a hit to revenue, but it will not be a hit to profit. I will say that we continue to not expect, well, we're no longer really expanding in terms of employees at this point because we're going to have extra resources as a result of using fewer at Goldman's. But we're not growing the base. We have, I think, 1,060 employees in India as of the end of October. We had a few more than that the previous month. We don't expect that to go down very much because we can use those with the other customers that we're working with. And with that, I'll just see if there are any questions. And as usual, we're always open to them along the way once you've had time to digest the queue and the reports and have other questions. Operator, let's turn it over to questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question, please press star 1 from your telephone keypad, and the confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd 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. One moment, please, while we poll for questions. Let's go to star 1. Thank you.