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.

Thank you.

Our first question is from the line of Hal Ketch with B Reilly Securities. Pleased to see your questions.

Hey, good morning, guys. Thanks for the call. I wanted to start with two questions. One is additional banks, what is the kind of environment we've had with the turmoil in the banking sector done to your pipeline? And as it relates to that with a new platform coming out maybe next year, is that our prospective customers waiting for that platform to come That's my first kind of side question.

Yeah. No one's waiting on the platform. They just want to get the job done. The platform is for something else. But I will emphasize, and thanks for the question, the fact that we're going to continue to work on that and add more resources to it. It will be at least another year before it gets out. uh, completely, but no one's waiting on that platform and we're, so we're growing the other part of the.

Okay. Yeah.

And on, uh, on Goldman, you know, uh, could just kind of reach out. Did you say, you know, right now the contracts, um, two to three year contract at a million dollars a month, is that kind of roughly what you guys said here just a few minutes ago?

Yeah, for the managed services piece of it, which is a portion of the professionals, two years, two more years on that, around a million a month run rate. And then the maintenance contract, which is a part of the license agreement, that goes through June 30 of 2026.

So what's been variable is professional services. Related to development. Which is development and other things that might be platform related from their standpoint, things they want to see done. And that can end up being from $300,000 a month to a million a month. So it's very much a variable. They want to keep it down on the lower side now.

Okay. Okay.

Part of what you're doing is not necessarily not getting something done, but it's just a request to to slow it down, use fewer resources so you extend the date for getting things done by using fewer resources and lower the cost.

Okay. Okay. All right. And in general, it's like, you know, it's card issue. I mean, if you look at mass card, these, even Amex, you know, these giant platforms continue to, you know, grow cardholders, you know, mid to high single digit year over year. So the backdrop for card issuance globally appears to be really, really good. And I just wanted to get your thoughts on the banks that you're serving. What's kind of the risk appetite to continue issuing credit right in this time period?

I mean, you're right. Card issuing is still growing. And I've said before that in a bad economy, you may see the number of cards increase and decrease. You simply see more delinquencies and you see maybe smaller credit lines, but you don't see fewer cards. And we typically get paid on number of cards. So we're not concerned about the dollar value of what goes on cards. We're concerned about the number of cards. And we don't see any decrease in that. What we do see is some of our customers that or people that we talk to that already have debit cards and were thinking about getting into the credit card space, they are slowing down that process because they're concerned about the delinquency side. But people who are already in the credit card space, issuing more cards is not a problem as long as you manage the onboarding in terms of scoring. But there will be an increase in the number of cards. That's not slowing down. And there's, I guess, opportunity to, again, I appreciate the question because it has kind of, she has to think about something else, and that is number of cards. I don't want anyone to take away from this the fact that we've not had any license revenue since the first quarter of this year, which, of course, does impact us a lot since that's all profit. But that doesn't mean that the Apple program has slowed down. Remember, Goldman has two programs. They have Apple and General Motors. And the reason that we've had no more license revenue is simply the fact that the way we get paid on active card numbers, and active card numbers have different definitions for different folks in the business. If you're a global sister, you may have one definition for active cards, but But then you also get paid for inactive cards. But this is a licensed deal with Goldman. So we don't get paid for inactive cards. We get paid for active cards. Now, the active card definition says if a card is not hit by some system, meaning somebody went to change the address, they went to make a purchase, they went to change credit limit, it doesn't really have to be a purchase. change the open to buy limit, that's still active if you do that with a certain month period. I'm not going to define the month, but let's say it could be three months, four months, five months, six months, something. So they discovered that they were hitting a lot of cards, a million or more cards for things that they didn't really need to hit them with, and I'm talking about with an API, and therefore they were still keeping them active cards. And so when they manage their cost well, they look and say, well, how can we not make those cards active since they haven't been buying anything anyway for, in some cases, years? So they did that. So therefore, it's taken a while for that to catch up. As Matt said, we expect to get license revenue in the first half of next year again. Hopefully the first quarter it could push out to the second. But the main card program that Goldman has is really good and continues to grow really well. And we'll get back on track with that next year once we've caught up with this sort of cleanup of cards that have gone inactive now. By the way, I added that to your question simply because I felt like I needed to make that explanation so people don't go away with the wrong thought that there's Big program's not growing. It's growing. It's growing well and doing very well.

So to summarize, there's still growing new cards, but then there's also an inactive card group within the whole portfolio that they're looking to make sure they're not paying for things that they're watching their costs really closely and by taking some cards to inactive status, they save money.

That's right, but you can really think of it as almost a one-time cleanup. Now, of course, you'll continue mostly, but it was a one-time, very big cleanup that won't happen again.

Okay, and that was the Q3 of that?

Yes, that's right.

Yeah, yeah.

Oh, yeah.

Okay, okay.

All right, thank you. As Matt came into the office this morning and said, Dang, it looks good, but yet it looks so good. I mean, it looks bad in one sense, but it looks so good. We're fine the way we see growth going longer term here. And longer term, we're talking about next year or whatever, but we've had a couple of these things that have hit us like the part mobile and like the cut in professional service revenue and then the cleanup of cards. So those are short-term things that we're comfortable with the rest of the business turns out to be.

Yeah. Okay, great. I'll get back into Q. Thanks.

Thanks, Al.

Thank you. Our next question is from the line of Avi Fisher with OneCast Advisors. Please just use your questions. Hey, good morning.

The 10Q calls out expectations that 4Q will see some, at long last, possibly some marketing spend. Can you sort of offer some color around that? How much? What's it for? Why now? What's the appropriate expectation on a payoff from that?

I will. Yes, we finally have a salesperson who came from a competitor, so got experience in the business, and they'll be focused on selling financial institutions. So it will not be short-term. They'll be calling on financial institutions who, many of them will be like credit unions or smaller banks who either have a credit program with someone else or want a credit program. So they'll be looking to try to generate business through that process. Now, again, you're free to tell me you went in too long, Leland, and I'll accept that. But I accept it more in the sense that the Economic environment changed, I think, faster than any of us expected based on the Fed and all these other things that put a hold on a lot of folks, a lot of people in banking. And I didn't expect that. We do have it. So we recognize reality and we now have a vice president of financial institution partnerships, FI partnerships.

all right um and and what you're saying is it's a long-term investment uh don't expect anything in the new york term on that i would be very surprised if you get anything from that in 2024 but i would love to be surprised right okay a few other quick questions you called out uh you know the non-golding revenues roughly 5.1 million apparently um What are the margins on that? Or if you can't just break that out, how does it compare to sort of 30% gross profit margins blended?

Well, yeah, we don't break that out. But keep in mind that that's not a business that's at scale yet. So the margins are going to be a little bit of a drag on the overall margins, just given that it's a lot smaller revenue base.

That's pretty small revenue, to be fair.

There's shared resources. So it's not just like everyone works on just this part or just that part. So there are some resources that work on both. So it is hard to kind of allocate that. And it's not something that we look at too closely at this size.

And in your expectations, I think you gave out some guidance.

what is the what what if you said it i apologize i missed it what's the did you guide to what the x goldman revenue growth should be next quarter uh we didn't talk about it next quarter there'll be some some puts and takes we talked about the park mobile uh the revenue the revenue and cost that will go away related to that um so there'll be some some caveats but uh we didn't give that specific number for for the fourth quarter uh but it'll be it'll be um I would say high single digits is what we expect.

Okay. And finally, there was a jump in deferred revenue on the balance sheet, which, you know, tends to bode well. Can you just discuss or disclose a little bit about around that? Does that lead to, you know, future revenues? When does that hit, et cetera?

It'll hit over the next, within the next 12 months. And most of that is is just related to timing of payments. So some customers paying invoices a little bit earlier for services that we've invoiced for but haven't yet provided. So a lot of that will come, some of that will come in the fourth quarter, but a lot of it, most of it will be in 2024. And is that new customers or is there existing customers and just timing issues? Existing customers, just timing. Okay, thank you. Thanks, Avi.

Thank you. If you'd like to ask a question at this time, you may press star 1 from your telephone keypad. We'll pause a moment to assemble the queue.

Once again, as a final reminder, you may press star 1 to ask a question. Thank you.

At this time, we have no additional questions, and I'll turn the floor to management for closing remarks.

All right. Well, I just want to say thank you, everyone, for your continued interest in the company, and if you have other questions, as I always say at the end, please feel free to contact Matt or myself. We're happy to answer the questions, and we're very pleased with where we're headed long-term, even though we're disappointed with some of the numbers point out, but either way, we're going to