Good morning. My name is Adrian, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter Earnings Release and Investors Conference Call. All lines have been placed on muted to prevent any background noise. [Operator Instructions] Thank you.

I would now like to turn the call over to CEO of Intelligent Systems, Leland Strange.

Please go ahead, sir?.

Thank you. Welcome, everyone, on the call today. We appreciate you taking the time to join us. I have with me in the room, Matt White, the Intelligence Systems and the CoreCard CFO; and Mark Raleigh, the COO of CoreCard.

We've recently officially set up an operating structure at CoreCard that [indiscernible] it has actually been operating in the last few years; Mark has the title of COO, and an office of a President that has five members, including myself as CEO. Management decisions were made among that group.

So I wanted to explain that even though we haven't updated the website. That's really the way the management of our CoreCard subsidiary, which is same as Intelligent Systems is now operating.

It appears it's been an interesting morning in the early hours, the market opening is – it's traded at over double our normal daily volume in less than two hours. I have to admit, I'm so much surprised as we thought our results were pretty good. The future likewise was looking good, but the market does what the market does.

I'm going to remind you that whatever maybe said in the course of the call, that's not a historical fact, it's a forward-looking statement within the meaning of federal securities laws. We'll be discussing events or developments that we believe at this particular time, given the facts that we have today may occur in the future.

These forward-looking statements are subject to a number of risks and uncertainties, including those set forth in our SEC filings. Our actual results may and probably will differ, sometimes materially due to numerous risk factors. The company assumes no responsibility to provide updates to this information except in accordance with legal obligations.

I think in a further comment on this statement, I can tell you that a year ago, we did not believe that 2019 year would be as strong as it turned out to be. I can say the same thing about our comments earlier about the 2018 years.

We felt that each would be good in January of the year, but had no information in January that would have backed up a forecast of what actually happened. Our budget forecast were not meant to be either conservative or to be a stretch. They were just our best guess.

I think we recognized and commented on calls that license revenue is virtually impossible to predict on a quarterly basis although we can come closer to thinking annual amounts. And I'm going to emphasize that we're closer since as I've often stated, we don't know how well our current or new customer will grow their portfolios.

In many cases, they also like good insight on that information. We want to be as transparent as possible because we know that shareholders and prospective shareholders want clarity.

We provide that and as much as possible, but the dynamics of this business has its limitations that will only start smoothing out actual and projections once we're generating$100-plus million revenue, in my opinion. I mentioned these things at this point, the content – or in the context of forward-looking statements.

We give you an internally plan on our best guess based on what we know and believe at the time. We make – at the time we make the statement. The last few years, we've been surprised with the upside, and I'm hopeful that continues to be the case. But I'm sure we'll get surprised at some point with the – on the downside.

I want to remind you of the long-term fundamentals in our industry because they are central to both our vision and our strategy. I think it's an important reminder realizing that our first maiden individual investment in the CoreCard predecessor company of $100,000 in 1986.

Intelligent Systems first made an investment in the predecessor company in the late 1990s. First data acquired the predecessor company in the early 2000s for several hundred million today's dollars. So when I say very positive long-term fundamentals, I'm really talking about long-term fundamentals.

Our strategy is designed to reward those who recognize the fundamentals as we do and support our strategy to build long-term value. Often, when you have companies make that statement, it might be because they're losing money and need to justify their continued expense.

I've been there and done that internally and externally with the CoreCard investment, but we're very profitable, we expect to remain so, even as we continue to invest in the long term. Our decisions are deliberate, driven by the goal of increasing long-term shareholder value.

Ultimately, our goal is to position the company to be a world-class processor for revolving credit that will come from having low-cost infrastructure, an agile workforce and software platform that could do anything the future may need for payments and credit.

We're going to let Matt talk about the fourth quarter at this point as well as the year, and then we're going to randomly answer some questions. I'm going to give a shout out to Slingshot Capital. We had some folks from Singapore, I think, six or seven folks from Singapore, investors that have been with us for a couple of years, come see us.

So we appreciate their visit. And no, we did not catch the virus, even though I think it's maybe as growing in Singapore. So Matt, I think, perhaps, go ahead and talk about financials, and then we can – we ask questions around the financials..

All right. Thanks, Leland. Good morning, everyone. As Leland noted, revenue and profitability results exceeded our expectations as our largest customers continue to add new features and product offerings. Revenue for the fourth quarter of [indiscernible] compared to revenue for the fourth quarter of 2018 of [indiscernible] million, an increase of 70%.

Revenue for the fiscal year 2019 was $34.303 million compared to revenue of $20.1 million for 2018, an increase of 71%. Excluding our largest customer, which represented 60% of our revenues for 2019, revenue grew 13% compared to 2018. We expect to continue to see meaningful revenue growth outside of our largest customer.

The components of our revenue for the fourth quarter consisted of license revenue of $2 million, professional services revenue of $5.998 million, processing and maintenance revenue of $1.879 million and third-party revenue of $426,000. And now I'll talk through the components of our revenue.

As we've mentioned in previous statements, our license revenue will vary from quarter-to-quarter depending upon the number of active accounts our customers have. The fourth quarter license revenue was driven by active account increase related to our largest customer.

As a reminder, we receive license revenue primarily when our customers achieve new active account tiers. Once that new tier level is achieved, our customer receives a perpetual license up to that number of accounts. And inactive accounts do not count towards the license tier.

We charge annual maintenance for our licensed customers, which is reflected in our processing and maintenance revenue line. Maintenance revenue increases each time customers reach a new tier.

As we said before, the contract with our largest license customer includes a maximum tier level, which because of the significant number of accounts, allows them to utilize the software for any number of active accounts once the maximum tier level is achieved. We would still expect it to be several years if that were to hit the maximum tier level.

This large customer currently uses the software for a single institution. Additional license fees will apply if multiple institutions are added. Then looking further into the revenue detail provided, professional services revenue comprises a significant portion of our overall revenue for the fourth quarter and year ended 2019.

However, as we've previously stated, we expect that to decrease as a percentage of total revenue over time as our customers utilize the new features we've developed to add active accounts to their system, which is, ultimately, reflected in our license revenue and processing and maintenance revenue lines.

Additionally, we continuously create new functionality for our customers, and as such, we charge annual maintenance fees for professional services, which is also reflected in our processing and maintenance line.

Our customers continue to seek out our industry-leading services to create custom, unique solutions, and as such, we do not perform any professional services for third parties that are not licensed or processing customers.

Generally, the types of professional services that we provide are high value-add services, delivered by highly trained personnel, primarily in India. These services include software development, system monitoring and testing and other similar services that require extensive training. As a result, we're able to realize a high-margin on these services.

And lastly, for revenue, our third-party revenue generally has a very low-margin and constitutes services we provide on behalf of our customers, which we charge at slightly or above cost. And we recognize this revenue growth for accounting purposes. Turning to some additional highlights on our income statement.

We achieved significantly higher income from operations of $3.979 million for fourth quarter of 2019 compared to $2.268 million for the fourth quarter of 2018 resulting in an operating margin of 39% for the fourth quarter of 2019 compared to 37% for the third quarter – fourth quarter of 2018, and 44% for the third quarter of 2019.

I'll talk first about the year-over-year improvement that was primarily driven by the contribution of license revenue, which was higher in the fourth quarter of 2019 than the fourth quarter of 2018.

And then for the margin decline in the fourth quarter compared to the third quarter, that was primarily driven by slightly lower license revenue, higher general and administrative expenses related to legal and personnel costs and higher research and development expenses related to accrued employee bonuses.

And now our year-to-date 2019 tax rate 18.8% compared to 0.1% in 2018 due to the utilization of net operating loss carryforwards in 2018. The 2019 tax rate benefited from tax deductions on stocks option exercises, which depend on the timing of the stock option exercise and the difference between the grant date and exercise date fair value.

And finally, earnings per diluted share for the quarter was $0.41 compared to $0.27 for Q4 2018. Full year 2019 diluted EPS was $1.22 compared to $0.70 for the full year 2018. And with that, I'll turn it back to Leland..

Okay, thank you, Matt. Obviously, we're pleased with the results. We're going to go to questions. I will tell you, we have had almost 40 questions submitted through our facts at intelsys.com, and I will not answer all those questions.

We have to understand that on the call are people that read the transcript are lawyers, competitors, employees, current customers, prospective customers as well as shareholders and prospective shareholders. So some questions are simply inappropriate for us to answer based on competitive or other reasons.

I know that you'd like to have the information about every little aspect of the company and how we operate, but we simply can't do that. One of the first questions that I will actually use an example of that. The question was asking, how do we maintain in our India operations, such low turnover? It's not – frankly, I understand the question.

It's not normal to have as 10% of your employees be ten year or plus ten year in an office in India. But I'm not going to go into all the aspects of how that happens. We want to keep employees. We don't want everybody else to have the same information that we have. So that's just one example.

So I will start with the questions, and I'll ask Matt to, I think, chime in on some of them..

First question, we'll answer. As you mentioned, you will be focusing on achieving great results with high visibility customers.

Did you have new customer wins this quarter?.

The answer is, yes. We had a new customer added during the quarter, but they are not going to be high visibility. There are very few high visibility customers that we will be adding. We hope to add two or three others, but frankly, when you look at high visibility we have, probably the highest visibility customer anybody could get.

So they're not going to be anybody that's going to achieve those kind of numbers or be recognized in that way. Most of the customers, all doing business that are just in their own particular vertical, you would not even recognize some of them.

So we are going to focus, as we've said, this year, particularly, on really working hard with our high-visibility customers to achieve great results. As they grow, we also grow. That's growth that's not required for adding new customers, although we'll be adding new customers..

Next question was, can you talk about how holiday sales impacted Q4?.

It's really probably nothing we can talk about that because that has to do with our customers and what they do. I would suspect holiday sales are in promotional campaigns definitely would boost our listing revenue, but that's kind of internal marketing data that they have..

Third question is, last quarter, you said that you didn't expect Q4 2020 to be as strong as Q3 2020. How have your results came in above Q3. That's 2019, actually what it's supposed to be. They said 2020. But last quarter, so you didn't expect Q4 2019 to be as strong as Q3 2019.

How have your results came in above Q3? Do you believe the strong beat took revenue away from Q1 2020? And how should we look at near-term revenue trends?.

I'm going to let Matt jump in on that one..

Sure, with the revenue coming in higher than expected, it was primarily professional services, but we don't think that any of that moved revenue between periods. So we continue to have the same expectations for Q1 2020 as we did before we saw the results for Q4 2019..

I think it would be fair to say, though, we were expecting Q1 to not be quite as strong, but we don't think it did move it, right. We think we'll have a good Q1. Now when I say that, I have to qualify based on license revenue. We've talked about this numerous times. We don't know when we'll get new license revenue.

Sitting here today in the middle of February, my best guess is we may not get another license bump in this quarter. We're likely to get one in next quarter. I could be surprised on that. But we do think our, what I'd call, repeating revenues, professional services and recurring, will be – continue to be strong in Q1 of this quarter..

Another question, R&D increased by 20% from the previous quarter.

How should investors think about this spending? Is the spending going towards developing new products or updating the existing ones?.

Let me take the first part, and I'll ask Matt to do the – or I'll take the second part and you do the first. Is the spending going towards developing new products or updating the existing one? I can tell you that it's not quite that clear-cut.

When you update existing ones, you're also developing, in many cases, new products that are hooked to a product. Our products all hang off the same big platform. So you're always updating your existing product to offer more and better features. And Matt, maybe you can answer the R&D increased by 20%.

How should investors think about the spending?.

All right. Some of that is accrued employee bonuses, as I mentioned. So as we continue to produce strong results, we want to continue to invest in our people so that those could continue into 2020..

Okay. Next question, looking at the increased spending level SG&A this quarter; can you walk us through the components of that spending? Can we expect the same level of spending for fiscal year 2020? So talk about the increase in SG&A..

Well, a lot of that is legal costs, hiring costs, personnel bonuses. We expect a similar cost structure in 2020. So we expect similar levels of SG&A, probably not as significant though as we saw for Q4 2019 on a quarterly basis..

Another question. In the release, you noted that fiscal 2020 will be a building period, and you're investing in building a stable foundation for the business.

Can you walk us through what sort of investments we can expect? What are the focus areas you believe to the most – to be the most imperative? And is INS hiring more developers? And then always the question is a hiring sales staff? And what do you hope to achieve during this building period?.

So that's four or five questions, and I'll try to take those. The investments that we expect or generally, again, in people, we're increasing our staff. We have now over 500 folks in our India operations. I would hope that we can have close to 600 by the end of the year.

It’s always a challenge to get the right kind of people in the right situations, but we're growing that staff. Obviously, we’re growing that staff because we believe that we will continue to grow our business, and we'll have new customers that will need to have that sort of staff or implementation.

In terms of other investment, there is some investment in infrastructure, but it's not significant.

When we talk about investing a couple of million dollars, and we have how much cash, Matt?.

Over $26 million..

$26 million. Okay, $26 million. We’re not talking about any significant needs of cash for investment. Is – the question was, is INS hiring more developers? I think the answer to that, yes, we're hiring developers and technical staff regularly.

Matt, any comment on the question?.

No, I don't think we'll just continue to hire.

I don't know if you want to take a couple of questions from the operator?.

Sure. Operator, do you have some questions, we'll take those..

Your first question comes from the line of Mike – Mark Palmer with BTIG..

Yes, good morning..

Good morning..

Hi. Nice quarter first of all. And I just wanted to dig in a little bit into the relationship between professional services revenue and – license software revenue and processing revenue. It was, obviously, a very strong quarter in terms of professional services revenue.

How should we think about how professional services revenue could translate into licensing revenue and I guess more importantly processing revenue down the line?.

Well, the professional services typically are performed for our license customers. And so it’s been adding new features and new product offerings, enhancing their system that we think will start as active account growth, which will lead to additional license revenue.

And then as we mentioned, to the extent the professional services or additional customization, there's add-on maintenance that we charge on a go-forward basis, that will show up in a processing and maintenance line. So those are kind of the two drivers of growth for professional services..

I know, Mark, you separated the question in terms of processing revenue and professional services. Once again, we consider professional services to be pretty much repeating revenue. It's hard for an analyst to deal with that in the same way.

But I think we've proven over two, three years now, how professional revenues continue to grow, and it's very much repeating from the same customers just as processing revenue would be repeating from the same customers.

You got a follow-up? Did we not answer it well?.

The next question comes from the line of Ishfaque Faruk with Sidoti & Company..

Hi. Good morning, Matt and Leland. Hey, a couple of questions from me. First of all, great quarter, congrats on the fantastic quarter. In particular, your professional services were significantly higher than what I was expecting.

Any particular onetime items, maybe like Q4 driven, that you might call out on that?.

Well, you’re obviously increasing your number of accounts very rapidly from a new rollout with the holiday season, and it require more folks to be involved, making sure things are going well. And I did also say we're developing new features during that quarter that will go live either this quarter or next quarter.

So no, it's not – it's more or less business as usual, I would say..

And if I may have a couple more follow-ups. In terms of maintenance, maintenance was a little light.

Is there anything to read into that, perhaps Leland or Matt?.

No, nothing to read into that. We expect that line to continue to grow. That will be a significant growth driver in 2020..

Got you. Got you. Okay. And then lastly, and are you guys – Matt, you mentioned growth of revenue. Ex your largest customer was around 13%, which is great.

But are you guys being approached by more and more like smaller FinTech type companies like the ones you already have like Kabbage deserve? Or is it more like large name brand banks that you guys have previously have been customers?.

Well, we talk to name brand banks, but those are not going to come on board any time soon if we get them at all, obviously, that hopefully will….

Of course..

But that's a future year kind of thing. And those are long, long conversations. So generally, you're talking about smaller FinTechs or you’re talking about some existing medium sized clients that might want to switch. There have been some of the processors that have had significant downtime and other issues.

And then you have also some folks that are with other smaller processors now. I am not talking about the First Data. There was the smaller processors who want to do revolving credit and the other folks really can't do that or do it well at this point. So it's a variety of customers. We can't take out a bunch of little ones.

That would be a distraction to us. We could take out one or two, but we can't take on a bunch. So we have to be somewhat strategic in our choices, thinking in terms of time lines. And when we think time lines, we think over several years how do they fit in, while at the same time doing a great job for our existing customers.

We do expect to continue to grow with new customers this year. So we will continue to have new business. And you also have to think about some of our customers will offer totally new products in a way that's like a new customer.

That's a total add-on to whatever they're doing for us now, and we're certainly going to pay more attention to a current customer that wants to add a current – or wants to add a totally new different product, but we treated almost as new customer requires the same resources from a business analyst, analyzing what they want, doing the implementation, it's all like a brand new customer.

So those will continue to increase. That's one reason, I don't think, we are going to separate from what's a totally new customer, meaning a new brand name, versus a new product. We just need to talk about how much we’re growing outside of our main customer, that ought to be the concern of the street, in my opinion.

Can you still grow the business outside of your one big customer?.

Yes. Guys, congrats once again on the great results. .

Thank you. Do you have any other questions, operator? I've got a few more we'll answer..

[Operator Instructions].

All right, let me go ahead and answer the one that always comes up, any time we talk, and that's, are you adding sales staff? The answer is no, not at this point. The answer might be different two quarters from now, but the answer is no at this point.

We’re talking to enough people that are enough potential customers that we don't think we need to be out storing for other names at this point. We’re looking at our book for 2020. We feel pretty comfortable that we will have decent growth.

Again, could be surprised on the upside, could be surprised on the downside, but based on what we see today, we feel will have pretty good growth. We want to do some things infrastructure wise before we really push hard for to 2021, which will be the year we definitely will be pushing for processing revenue, that’s 2021.

All right, any other questions?.

[Operator Instructions].

All right, I think I probably answered the main ones that we've been given. Sorry if I didn't run your question, either for some of the reasons that I mentioned earlier or just based on time. I want to tell you, we definitely thank you for your interest in the company.

As always, we say that if you have other questions that we can answer, given the guidelines that we have, please give Matt or myself a call, we'll try to be available for any questions you might have. So thank you, everyone. We look forward to the next call in about three months..

This concludes today's fourth quarter earnings release and investors’ conference call. You may now disconnect..