Good morning. My name is Andrew, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the 2018 fiscal year earnings release and investors conference call. [Operator Instructions].

Leland Strange, Chairman and CEO of Intelligent Systems Corporation, you may begin your conference. .

Good morning, everyone. Thanks for joining us today for our fourth quarter earnings call. I suspect or guess we'll have more people than normal given the stock value in the last few days. For those of you who are on the call for the first time, be prepared for this to be a little different than what you may be used to. .

I'm going to start today by just noting the usual protection provided to the company and company executives with forward-looking statements within the meaning of the federal securities laws. Simply put, everything I or the team says that's not a historical fact should be treated and read as speculation.

It's speculating on what we think or believe as of this moment. We obviously believe it. We believe we have a good basis for what we think, but it may be proven incorrect in the future if it's not actually a historical fact. We may expect, project, believe, plan, intend or use any number of other similar words in this call.

So to be clear, everything and all I say that's not an actual report or current fact should be deemed a forward-looking statement, and if we learn other facts later that could lead to different opinion or conclusions, we may only and probably will not make further comments until required in filings..

So with that behind us, I'm going to assume that you've read the press release or even perhaps the 10-K that we filed earlier this morning. With that underlying assumption, I'll only repeat a little of the information contained because you can read that for yourself. It may be a little unusual for those of you who listen to other conference calls.

It's probably also unusual in that I may just follow some bullet points and generally be talking unscripted. I'm not sure that's really a word. Let's just say, I tend to go off script anyway, so call it unscripted or non-scripted. With me in the conference room and on the call is Matt White, the CFO of Intelligent Systems.

I may call on him to assist or to help answer any of your questions after I conclude my remarks..

I could start my comments with the financial facts in the press release, but I would be ignoring the recent run-up in our stock and rumors that are currently on The Street. So let's hit those first.

Understand that, in almost all of our agreements and contracts, we have NDAs, nondisclosure agreements, that prohibit us from disclosing the fact that we have an agreement without prior permission. Why do we agree to that? Well, really why not.

We work and supply services to our customer, and our customer should be able to disclose whatever they wish to their customers without CoreCard interference. In some cases, our customers find it advantageous to disclose fully or partially that CoreCard is their vendor. In other cases, it's a well-kept secret.

And in many cases, our customer may say to us, "Do not publicly or in writing disclose, but it's okay to use our name when talking to prospective customers.".

So unlike some of our competitors, we don't put out press releases or announce new contracts other than where pretty much required in our filings or shareholder communications. We don't tout new contracts in order to boost the stock price, we just run the business. .

With that background, where does that leave us when rumors that may or may not be true are publicly floated. Of course, the best position is just to say, no comment. Someone has asked, "Well, if it's not true, why not just say it's not true and everyone would then have the truth." Well, I can tell you that I fell in that trap many, many years ago.

In the early wild west, early personal computer days, a magazine printed that our company had inked a large contract with Hewlett-Packard. I responded, it was not true, and it was not. A week later, in a newsletter at a trade show, they retracted and stated, the rumor had it that it was not HP, but it was Epson.

I said again, publicly, and categorically, not true. Then lo and behold, the following month, they came out in the magazine and said it was with IBM. Well, that happened to be true. And I was caught where I could not plausibly deny it after denying the earlier speculation. Clearly, I should have said, no comment, from the beginning.

I learned then it was best to avoid that trap..

I think it's clear from our required filings and public statements that we have several, and I want to emphasize that word, several new, what I believe, important customers.

If we could disclose the names of 3 or 4 of them, I think you'd be impressed that this little firm in Norcross, Georgia with 0 sales or marketing had been chosen to provide important services for these billions of dollars valuation firms. Some of these are generating considerable current revenue now and some are teed up for good future revenues.

Some are licensing customers and some are processing customers. Both often have some front-end-loaded expenses, expenses for them and revenue for us..

So I'm telling you today that I'm going to neither confirm nor deny the rumors, nor will I publicly identify any large firms that are customers of CoreCard without their permission. I'll put equal weight on the rumors being false, as being true.

If you invest in our stock, you should be aware of our position in this regard and no matter of prodding is likely to give you any comfort or discomfort if you're relying on publications that purport to know. You really should just rely on our performance and not the names of customers..

So now on to performance. Actually, before I forget, let me comment and state that the company bought back no stock under its previously announced buyback program. So as of this date, we have bought back none. I believe, when we decided to do the buyback, the stock was in the $10-$11 range, and we felt, with our cash, that would make sense.

Of course, there was not much volume, and as the stock started moving up, which, by the way, proved that our judgment was good, we chose not to interfere with the normal stock transactions..

Moving on, let's start with some financial facts of the press release. Our fourth quarter delivered an operating profit of a little over $2 million, and I tend to concentrate on the operating profit line as it generally is what can be managed. And for the full year, the operating profits came in at about $6 million.

Taxes were small for the year as we used up all of our NOL. So we will be paying taxes in 2019. Our revenue for the quarter was a little over $6 million, and for the full year, revenue was a little over $20 million..

Let me mention pass-through revenue. We have to include pass-through revenue in our reported revenue. And a portion of the revenue -- and I'm going to point this out because there's very little margin on this revenue, the pass-through was about $500,000 for the year.

An example of pass-through revenue would be paying to produce a plastic card for a customer.

Did I get that number right?.

That's the 2017 number, Leland. For 2018, it's $1.3 million. .

Okay. Sorry about that. So Matt corrected me. The number for pass-through in 2018 was $1-point... .

$1.3 million. .

$1.3 million. So again, that's why it's important to understand that part of the revenue. An example of that revenue would be paying to produce a plastic card for a customer. Some customers have us do the card fulfillment and some do their own.

If a vendor charges $1.5 for a plastic card, we might just tag on $0.05 or $0.10 as a handling charge rather than actually make margin. So when you look at our margins, we also have to think about how much was pass-through to see what the real operating margins are..

In the last conference call, I took the time to try to explain our business and revenue streams. I'm not going to repeat all of that today. I would suggest, if you're a new shareholder, you might want to go to our website to listen to the last call, if you want to hear more descriptive information.

I will repeat, however, that our revenue generally comes from 5 sources. There's license fees, and there's very little current cost, so these are very high margin. Remember, we spent money over many years to be in a position to get a license fee. So that's a sunk cost. The license fee varies with volume, meaning number of accounts..

Second source will be maintenance and support for licensees. This is recurring and is based on the amount of the license fee. Third stream would be processing services. Generally, you're paid per account per month. And fourth is professional services. That's not technically recurring, but it's certainly repeating.

And it's a big chunk of our business and we like that. We have highly qualified technical people that are very valuable for use by our customers. And then fifth is managed services. Sometimes we monitor or actually run other customers' operations. So those are your sources of revenue..

I'm often asked, why do big firms with loads of technical talent come to this little company located in Norcross, Georgia with no salespeople. I usually, somewhat facetiously, remark, it's because they were smart enough to find us, which makes them a good candidate to be a customer of ours.

And seriously, we like smart and knowledgeable customers who are capable of doing a lot more than just kicking the tires. .

Let's say, they get under the hood and investigate carefully what CoreCard is. What do they find about the platform and software? I'm going to give you a good example. There are a lot of things that make the CoreCard platform more powerful than anything else on the market.

I say this while we also do some very mundane things with that platform that are easy for others. An example would be vanilla-variety prepaid or payroll card. Competitors in this space would be Marqeta, Galileo, I2C, they're all private, and the big guys, FIS, Fiserv, First Data and TSYS.

So those are just kind of plain, what we would call, vanilla programs. Now of course, those guys do other things, too, but I'd just used that as an example..

So let me give you an example of a hard problem solution set that I'm not certain anyone else can do. I suggest you pay attention because it gets complicated. A customer goes online to Bass Pro Shop to buy a $3,000 pontoon boat. When they're checking out, an app asks, if they would like to pay over time.

They're given a choice of 12 months, 24 months or 3 years. And that's based on the size of the purchase and with instant scoring of credit. The customer can click for details and see 12 months is at 8% interest, 24 months is 10% and 36 months is 12%.

Different customers also may get different offers that get different interest and/or duration, length of loan, based on a scoring algorithm. And they can see what the monthly payment will be for each plan. So in this case, the customer chooses 36 months at 12%.

Now that's simple enough, most installment loan platforms can do all of this up to this point..

But let's go on, 20 days later, he goes online again with Bass Pro Shops and buys a new motor for his pontoon boat. The price is a $1,000, and he's given similar options for paying over time, but Bass Pro Shops and the motor manufacturer will subsidize the interest on this purchase and offer no interest.

The customer then chooses between 6- and 12-month plans and he accepts a 12-month plan at no interest. Of course, if he fails to make timely payments, interest or fees will be assessed later. And then the customer goes online the next month and buys fishing gear for $500. The offer is 6 months at 6% interest. .

He now has 3 loans. Most loan platforms can handle 3 or any number of separate and distinct loans. But is it really very customer-friendly to send out 3 statements and expect him to make 3 separate payments? Of course not. And ultimately, everything gravitates to the most customer-friendly solution. .

CoreCard combines these loans into one statement. There's still 3 loan plans because each is different. That sounds simple enough. But if you give a customer one payment amount, there are regulations, called Reg Z, that require you to inform the customer what the APR, that's annual percentage rate, is in a combined form.

Here, we have interest rates of 12%, 0% and 6% with durations of 36 months, 12 months and 6 months. .

CoreCard presents one statement that aggregates the required payment amounts and computes the APR for the combined loans. And guess what? When he sends in his check, he sends in the wrong amount and sends the check 10 days late.

Oh, oh, computer, what do I do? To which loan do we apply his payments and which loan will be delinquent because he underpaid? CoreCard has rules and algorithms that spread the payment over the proper buckets to stay in compliance with debt regulations and loan agreements..

The software determines where to apply interest, fees and principal and at what amounts to each loan plan. Remember, one of these loans was interest free. That's complicated enough, but on the 59th day, he has 60 days, by the way, to make any returns. On the 59th day, he returns the motor to Bass Pro Shops.

And the check he sent in on day 60, by the way, for the wrong amount, it gets returned and insufficient funds 3 days later. This is where the rubber meets the road, so to speak, as far as handling a complex transaction, while staying in compliance.

A payment reversal has to look at the plans again, just like the payment did and reestablish the proper billed-not-paid amounts and also generate appropriate fees, again staying in compliance with regulations..

I guess to get really exciting, let's do a return followed by a payment reversal for the customer that has over 100 loans on their account. And yes, we process for a unicorn that has an account just like I described, with over 100 loans on the account.

Oh, did I say we could also add a standard revolving account to the loan account that incorporates minimum payments?.

So CoreCard generates all the documentation necessary for the loan, that's loan agreements, welcome letter, temporary shopping pass, et cetera, and we have integrated collection software that keeps up with the required collections. When collecting, one often waives certain penalties, they re-age the loan and report to the credit bureaus.

And then he might want to securitize one part of one loan and sell it off or move the loan from one bank to another and reissue the loan agreement, or the CFO wants to look across all loans of a certain type and project in the future how much interest or fees are coming in for each month the next year..

All right. There are many complexities I can continue to add to this example. And I believe very few, if any, other loan platform can do all of these things. This is just a sampling of the power of the CoreCard platform, and why we're confident that, over time, more and more potential customers will recognize the competitive value. .

Now did most of CoreCard customers use all the power of the platform to issue complex loans? No. The answer is, no. But smart managements want to do even simple things on platforms that have a capability to do the most complex things as their own business evolves. That's why many of our customers have chosen CoreCard.

Bulletproof to the future as FinTech opportunities evolve..

I think I'll go ahead and conclude our call, after that example, with simply a brief comment on the first quarter and the 2019 year. As I have said and reasoned in past calls, we're not giving specific guidance for good reasons. But I will say that this first quarter, the first quarter in 2019, will be better than last year's first quarter.

And 2019 should be a very good year in comparison to 2018, which was also a good year. We will probably have quarters that may not compare well as a result of how we recognize different revenue streams. So measure us by full years. .

I believe I said in mid-2018 that the company should be able to grow top and operating profit lines by at least an average of 25% per year over a 4- to 5-year period. I'm still pretty comfortable with that statement. .

I think with all of that, we'll open it up for questions.

Operator, see if anybody has questions?.

[Operator Instructions] Your first question comes from the line of [ Nanem Khan ]..

Your next question is from the line of [ Marco Lima ]. .

This is [ Marcello Lima ]. I was wondering if you could explain to us how -- just how automated are all these transactions that you described.

So is this all done by software? Or are -- do you actually need bodies in the back end to allocate all these loan amounts and do all these -- run all these algorithms and make sure that the checks are applied properly, et cetera?.

It's a good question. No. It's absolutely all embedded in the software. There's no human intervention in calculating any of that or figuring any of it out. .

Okay.

And could you, I don't know if you'd like to talk about this, but if you could describe to us what does the technology stack look like for CoreCard? Is this sort of a software-as-a-service product? Does it run on premises? Is it [indiscernible] somewhere? Who is your cloud provider, et cetera?.

Well, we license it. The other processors can use it on -- in wherever they want to install it. We also have it installed in our data centers so that we can run it as a processor ourselves. So the same software we use to process for processing clients is also used by our licensees for them to be a processor for their clients. .

Understood. So from what you're saying is, they can download and install the product -- the software on premises or they can run it from your data centers.

Are you running from your own data centers? Or are you using AWS or Azure or another cloud provider?.

We use QTS, actually. We use -- we have a big cage operation in Atlanta or Suwanee, and then we have disaster recovery in Richmond. This is not the kind of software you just download and put on a local computer. You're going to put it in a data center some way -- somewhere. .

Okay. And you talk about -- in past calls you've talked about licensing sales sort of not taking business. People were knocking on your doors and you said, you didn't have the capacity to take on that business.

What can you do to make this more scalable? Do you have to add more people? Do you have an interest in doing that? What can you do to make this a more scalable process?.

Well, we're always adding people at this point. We actually think it's pretty scalable, but nothing has -- I mean everything has limits to scalability. If you look at comparison between year 2017 and 2018, I would say, we scaled pretty well in terms of revenue and profits. I think we'll scale pretty well in 2019.

So I'm not going to try to scale at a 100% a year, I think that's probably irresponsible. I'd be happy to scale at 25% a year, maybe higher. But we're in the FinTech business, it's the kind of business that you don't take chances by growing so fast that you make mistakes because it takes forever to recover.

Everything we do is very, very important to our customer, and everything has just got to be right. So you don't run around loosely doing this, you do it very carefully. But we think we're scaling pretty well at 25% or better percent a year. .

Do you think it would be possible in the future to breakout those 5 sources of revenues, just so we can see, for example, what percentage of your $18.7 million in service revenue last year was due to professional services, and how much each line item of those 5 sources of revenues contribute to the top line?.

I'd suggest you look at the 10-K because we breakout a fair amount of that in the 10-K. .

Okay.

And what would you say are sort of your biggest constraints to growth? Like if you could wave a magic wand and solve 1 or 2 key problems or constraints that are keeping you from growing even faster, what would that be?.

Well, if I had about 20 more people that had 15 years of experience using the CoreCard software, I could grow faster. And there is no magic wand that can make that happen. We have a lot of good long-tenured employees who know this business backward and forward, and we're -- we focus on trying to continue to grow that base.

But you don't get -- you don't get 10-year, 15-year-tenured folks overnight. So I think we're growing it as fast we ought to grow it in a reasonable way. .

Could you -- you listed a number of your traditional competitors. And you mentioned a number of these in the past as well.

What are some competitors in the more exotic, I guess, more value-added services that you -- all the stuff that you described of making different payments, applying to different loans, et cetera? You said that this was pretty unique, but do you have competitors in that space as well and who would they be?.

We don't know of anyone that can do the example I gave you. .

[Operator Instructions] There are no further questions at this time. .

Okay. Thank you for joining us today. I'll remind you again, read the 10-K that was filed this morning for more risk and information and also our website will include a transcript of this call by sometime tomorrow. So thank you, everyone. We appreciate your time. .

This concludes today's conference call. You may now disconnect..