Greetings. Welcome to CoreCard Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Matt White, Chief Financial Officer.

Thank you. You may begin..

Thank you. 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 will 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 2021 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 2022 was $15.2 million, a 14% increase compared to the second quarter of 2021.

As a reminder, we recognized approximately $600,000 of maintenance revenue from our former customer Wirecard in the second quarter of 2021. Excluding the onetime impact of this revenue in the second quarter of 2021, revenues grew 19% in the second quarter of 2022 compared to 2021.

The components of our revenue for the second quarter consisted of license revenue of $1.8 million; professional services revenue of $7.6 million, an increase of 25%; processing and maintenance revenue of $4.5 million, an increase of 8%; and third-party revenue of $1.3 million.

We continue to onboard new customers, both directly and through various partnerships we have with program managers, such as Deserve and Vervent. We currently have multiple implementations in progress with new customers that we expect to go live in the coming months.

We are working on launching a new program with an existing customer, Cardless on a co-branded card with American Express. Once live, we will have a direct connection with American Express, similar to what we have with Visa and Mastercard today, and we will be able to process other customers who want to use the American Express network.

We say this a lot, but as a reminder, there are always several parties involved in implementations other than the issuer processor, including banks, networks and other third-party service providers. Issues with any one of these can cause delays in the program launch.

As I mentioned, processing and maintenance revenues grew 8% in the second quarter of 2022 compared to the second quarter of 2021 from the recently added customers mentioned above, who are now live and continued growth from existing customers.

Processing and maintenance growth over the same periods was 26%, excluding the Wirecard impact discussed earlier. Revenue growth, excluding our largest customer and excluding the impact of Wirecard was 30% in the second quarter of 2022 compared to the second quarter of 2021.

One thing to note about our revenue from Goldman Sachs, they closed on their acquisition of GreenSky at the end of the first quarter of 2022. GreenSky was an existing customer for us for a portion of their business and starting in the second quarter of 2022, these revenues are now included in the Customer A total in our quarterly and annual filings.

Turning to license revenue. We recognized another license tier in the second quarter of 2022 as expected, resulting in $1.8 million of license revenue for the second quarter. We do not expect a new license tier in the third quarter but could achieve a new tier in the fourth quarter of 2022.

Professional services revenue remained strong in the second quarter. We anticipate professional services revenue in the third quarter in the range of $6.7 million to $7 million. We consider this revenue to be repeating as evidenced now by 4-plus years of significant growth in professional services.

However, there are still fluctuations quarter-to-quarter, and we can still have both positive and negative surprises from what we expect, although we don't anticipate any huge surprises either way. Turning to some additional highlights on our income statement for the second quarter of 2022.

Income from operations was $3.5 million for the second quarter of 2022 compared to income from operations of $3.9 million for the same time last year. Our operating margin for the second quarter of 2022 was 23% compared to an operating margin of 29% for the same time last year.

The decrease is primarily driven by lower license revenue and continued hiring in India and in our Colombia office that we opened in October 2021. Our second quarter tax rate was 23.9% compared to 26.3% in the second quarter of 2021. Earnings per diluted share for the quarter was $0.33 compared to $0.32 for Q2 2021.

We remain incredibly optimistic about our long-term prospects and believe the investments we've made in our infrastructure and in hiring and training new people will continue to yield new customer wins and revenue growth.

Due to our solid performance during the first half and we are confident in top line growth expectations of at least 30% for fiscal 2022, compared to our previously provided guidance of a range of 25% to 30%.

The opportunity ahead of us is significant and CoreCard remains a growth business focused on meeting the evolving needs of modern issuers while generating long-term value for our shareholders. With that, I'll turn it over to Leland..

Okay. Thanks, Matt. I guess I should comment first on the increase in top line growth estimate for 2022 where you moved it up to 30% -- at least 30%, say 25% to 30%, but I'm going to hold that to the end. Let me emphasize and expand on several things that Matt said because I want to be certain that we understand the importance.

We mentioned that in the previous year, we booked approximately $600,000 in revenue from Wirecard. And in this quarter, we had none from Wirecard. That is revenue that we had to make up in order to grow about 14%, which we did. As Matt said, 19% growth, you factor that in.

Now it's not okay to play those numbers like I just did, if in fact, you lost the business. We often get asked by new potential investors to talk about customer losses or churn as is typically characterized.

CoreCard has not experienced any customer losses that I can remember over the last 10 years where the customer decided to go to a competitor or even to use their own internal software. Wirecard, for those who do not know the history, was a German public company that had been, I think, market valued at $27 billion at its peak.

It was called Europe's greatest fintech. They were a bank. And our primary business was on the acquiring segment of the payment space. They had licensed, and were using our issuing software for the Middle East. It turned out that they were a house of cards.

The major auditing firm had been hoodwinked and they crashed into bankruptcy and criminal charges were filed against the executives. And they're still prosecuting those cases. So we lost that business, which was actually extremely profitable and is slowly disappearing from our comparables. I would also mention GreenSky.

GreenSky was and is a customer that's been acquired by Goldman Sachs. We believe the vertical portion of the business that they use CoreCard for will probably be discontinued, and that's just my best guess. But it's another hole that we'll need to fill to maintain growth.

Fortunately, it's not nearly as large as the Wirecard business for us, so it would be easier to backfill and probably take a longer period for them to go from where they are to zero as they -- if and as they were to wind down. I guess the last one I'll mention is a Kabbage.

Kabbage was a very significant customer, and they sold their business for, I think, around $800 million to American Express. The legacy customers were not part of the sales. So we continue to service and receive income from the old Kabbage. But eventually, that also is likely going to zero.

On the other hand, we've picked up American Express as a processor to customers to process their small business offering, utilizing the customized software that we develop for Kabbage. I guess, I probably shouldn't understate customized.

It's really they heavily characterized standard CoreCard offering that allows Amex to do things they cannot do easily with their own software. So when you ask us to tell you the customers we've lost, the message can get confused if we were to say we longer service Wirecard, GreenSky or legacy Kabbage.

While it may be true, we did not lose the business due to a better offering, either internally or to a competitor. So we typically lose no business to churn, but we do have to sometime fill some revenue holes. I think I just wanted to clarify that because we talked about the business being sticky, and we believe it is really sticky.

Another comment I want to expand though, is the upcoming launch of a card with the American Express logo. You all know that American Express is both an issuer as a bank and a processor for the Amex card. They have what we call rails with merchants similar to the rails of Mastercard and Visa.

Historically, Amex was the only processor that could process the Amex card. But due to the all -- due to all the new fintech offerings, Amex does not want to be left behind and they need processor partners that can meet the requirement of new innovative cards as well as respond quickly.

We're all familiar with the Delta Amex card it is issued and processed by Amex. But the Cardless program that we'll be using for the Amex card will be processed by CoreCard. We have several other programs lined up for going live either late this year or early next year. And a couple of those are with Amex logo.

All are smaller in the beginning and all hope to basically be large. Some will successfully grow the large programs and some will not. None of us are smart enough to predict in advance which will be the big ones or which will not. So we take a calculated chance by investing resources to get them into the market.

And we often remind the investment market that we took the chance with Kabbage and it became one of our top three revenue generators in the past quarters.

And we took a change with a small company called Final, which actually did not succeed as a card program but was helpful in our eventual relationship with Goldman Sachs, which actually bought Final. Another topic that's often tabled concerns naming or doing press releases on our customers.

Since we believe it's up to our customers to tell the world what they want to tell them about their business and not up to us as their vendor, we generally don't do that. But we do make exceptions if we call we feel it's in our customer best interest or maybe they want us to or because of regulatory requirements.

We've previously named Deserve as one of our best, and I will use the word esteemed customers. Deserve serves as a program manager for several named card programs, and they use CoreCard as their primary credit processor.

Deserve has many things CoreCard does not have, such as customer service, and they offer other services that compete with what we offer. But they're very good and very knowledgeable in the credit space, particularly in origination, and they provide great value in the card issuing chain.

Together, we're pretty formidable as we can do the more complex credit offerings that many of their customers want. They're private and at least before the general valuation melt down, they had raised private capital from some of the more sophisticated investors as well as some other industry players at very high valuations.

One of our other long-term licensee that I don't know that we've mentioned in the past, but I think just okay to mention, there's a New York company called PEX, it's P-E-X. Again, a well-run company that has a particular niche market in what I would call commercial hard white. Another licensee is -- you have to help with this, Matt. American….

AmerisourceBergen..

continuing to grow our processing businesses and provide the very best services possible to our largest customer and their processing customers, while simultaneously investing in developing the next CoreCard platform for the future and expanding our trained employee talent base. I think let me stop there and just take any questions that we may have..

[Operator Instructions] Our first question is from Mark Palmer with BTIG..

Yes. Thank you, and good morning. If you can provide a little bit more color at a granular level, if possible.

With regard to professional services revenue, I certainly appreciate the guidance that's provided each quarter and understand the recurring nature of this, but it would be helpful to understand, what are the drivers of the changes from quarter-to-quarter in professional services revenue? And to what extent is that correlated with increased license revenue, for example?.

I'll take the first shot and then let Matt weigh in. It's really -- it’s probably really hard to correlate it with license revenue. I see where you're coming from there.

But things can -- it could be higher simply because one of our either licensed or non-licensed customers wants to do a lot of specialization, customization or use more of our services for a future product. That doesn't necessarily mean that we'll get more license revenue from it. It could mean that, but it didn't necessarily mean that.

I think the license revenue is more driven by how much promotion and marketing our customers put into growing their portfolio rather than what we're doing upfront. Now there is a caveat. Obviously, if you have a very large customer coming on, and it takes a year of extra professional services to get them ready, that could be a driver for that.

But often when that happens, if it's a licensed customer, they tend to back off of some of the other stuff they're doing. So you don't get the full impact of it. So I'd say, Mark, it's really hard to use that as a as a predictor. Matt, you want to..

Yes, I think the idea from our customers that are demanding new features or new functionality for their customers is that, that would result in new sign-ups. But it's -- it doesn't always translate into net new active accounts that would then translate into new license revenue..

And maybe they have to do that just to continue to expand that the current way they're expanding that, right?.

Yes, I could just be keeping up with the market. It could be something new that drives growth, but it's hard to translate that directly. But if our customers are growing, we expect to continue to have strong license revenue -- and I mean strong professional services revenue. So it's an indication of at least expected future growth..

And one more question.

Could you give us an update on the road map with regard to building out your platform, the next version of your platform, what -- where you are in that process and how you are thinking about the cadence of investment during the balance of 2022 and then beyond that?.

Yes. Well, software, it's always a little bit of a moving target, of course. So I wish I could pin people a lot more, but it's only a moving target. So we're really investing in two things. We're investing in the totally new platform. I'd say totally new. We'll use part of it in the old.

But we're also continuing to work on the -- gosh, I hate to call it an old platform. But the current -- let's call it the current platform, we still have to continue to make changes with the current platform. So we're really spending on both sides. I don't know how to quantify that in terms of dollars.

It really -- it all comes back to my comment when I talked about operating margin. We're just going to keep doing what we need to do in order to grow the top line at a very profitable basis over the long term. Matt, could you be able to say any more on that? It's hard to..

The amount we're capitalizing, it hasn't been that significant. And -- but there is an impact on R&D expense for the amount, we're not capitalizing. So there's certainly been incremental costs and those will continue to be at a similar pace in future quarters to what they've been so far in 2022..

It even -- Mark, it even gets more confusing both for us and probably more so to you and try to analyze it and this is that some of the expense on the current platform is paid for by a customer as part of professional services. Both we have expense on it, some of professional services are paid for current platform changes.

And then we incur all of it -- 100% of it for the -- what I'll call the future platform..

Our next question is from Anja Soderstrom with Sidoti..

Congratulations on a great quarter.

Can you just talk about how the build-out of the teams in India and Colombia is going and sort of how the labor market is there for you?.

Sure. Glad to. The good news is that I think we're coming up to speed pretty well where we want to be in terms of India. Not quite there, but pretty close. Things have gotten a lot looser. We're able to hire a whole lot better.

We've got a bunch of big interns, maybe as much as a couple of hundred interns there that -- so we're growing our base there for -- to take care of our future revenue. That we'll have to be looking for more space there, I think, before long, and figure out what we're going to do that in terms of the campus.

So the India team is growing and doing real well. We still get the turnover that a little higher than I would like to have. I'm kind of hoping some of that might also settle down in the next couple of months as the markets settle down, but generally it's good. Now Colombia likewise, we have about 30 people there.

One of the -- one of the difficulties there and one of the things that affects our current operating margin is that we expected to use them a lot for our largest client. And of course, it's Colombia, we've had problems getting approvals based on technical risk to use them there.

So we're not getting the output from them in terms of billable or -- I guess that's the best way to say it..

Revenue generating, yes..

They're not generating revenue for us. But they're getting trained well, and we'll transition them more to our current processing environment if we have to. We'll probably slow down hiring a little bit. We'll continue to expand some. It's been fairly expensive there more than what I anticipated. We do send our India team also with Colombia to help train.

That's also been a lot more expensive than we anticipated. It was hard for me to believe that airline tickets are $3,000 between India and Bogota right now. And that's what we've been paying recently when we send folks there, so we're going to slow that down.

But generally, we're very pleased that we're -- I think we're finally getting a good bench, and we'll have a good trained group of people for -- in the next six months, that will allow us to give some larger customer confidence that we can take care of them..

And one thing to add on that for the interns, just to clarify, we're not including those in our numbers, in our 10-Q filing since they're not full-time employees. But once they become full-time employees, we do decide to make them a full-time offer, we'll include them in the total..

So you'll see some big jobs in terms of our employee base in India..

Okay.

And did I hear you right that you're planning to use in Colombia for your largest customers?.

Well, we had intended to use them primarily for our largest customer, but because of the perception of the -- what we call tech risk working out of Colombia, we've had a difficult time getting it approved. So we're probably going to transition them more to our own processing platform over the next six months. Right now, they're in training anyway.

So you're not going to get any revenue generation from them. We'll have to do some other things for our largest customer. And actually....

But that would be for your existing largest customers, right? Or anticipated larger customer?.

Yes. I'll -- yes, I'll go a little further than that. We're actually moving -- moved several half dozen-or-so folks from the India office to the U.S. site. So you'll see our U.S. payroll go up as a result of obviously a different compensation plan. So the move of some of our key people here is also probably primarily for our largest customer..

Okay.

And how -- is there any color you can give on how the discussions are going with other potentially large customers? Has the sentiment sort of change due to the economic environment, or?.

There's really been no change. There are discussions about things that are out a couple of years away from the -- from our standpoint, on our processing environment, I think it's interesting also -- and I'll just quote it here, what happened in the Goldman Sachs earnings conference call a few days ago.

I think there was a question asked David Solomon, is -- I'm going to pull it up here, I said -- this was the question. "Hi. Good morning. I know you've got GreenSky in the belt, the General Motors card, the Apple is doing gangbusters.

So I just wanted to get a sense for how you're thinking about other opportunities." And his answer was, "There's a lot of partnership opportunities and lots of people coming to us, given our relationships, our technology, et cetera. They're interested in doing things with us.

At the same point, we've done a bunch over the course of the last 5 years to build this business. And as we said, we put a couple of big partnerships on the grounding cards. I think our intention at the moment is to be focused on integrating these successfully and making sure we execute at a very high level.

Certainly, as we get out to 2023 and 2024, we'll be more open to other partnerships." So that's kind of a quote from David Solomon. And I would say, we kind of say the same thing, that we've done a whole lot, and our attention at the moment is to focus on making sure we execute at a very high level..

Our next question is from Khadir Richie with Richie Capital Group..

Matt, Leland. Congrats on the good quarter. Just had a couple of questions for you. And they're more forward-facing, big picture questions. I love the investments that you're making on infrastructure and the near-term visibility that you have and the new offices that you're building out.

And I was just wondering, how do you think about the business longer term in terms of increasing the recurring revenue streams that you have that are predictable and possibly reducing some of the lumpiness as well as the customer concentration.

How are you thinking about balancing those or achieving those types of goals in addition to remaining profitable? How do you think about that?.

Well, I think about sort of two separate businesses in a way, and I want to grow both of them as quickly and as responsibly as I can. So in terms of diversification from a concentration, I don't know that we're going to do that for a long time because I want to grow that business. It's a good business. It's a store customer.

And I just want to do what I can and focus our resources to make sure they're happy and do what we can do with them. At the same time, I also want to go to the other side of the business.

But I'm not optimistic, and I'm certainly not saying either about the fact that I don't think I can grow the other side of the business much faster than I can grow the concentrated customer side of the business. It will grow a little faster perhaps because it's smaller. So at this point, you'll see higher percentage growth.

But I want to grow on both sides. It's just a good business. It's the kind of customers we have. A lot of people would pay a lot of money to get those kind of customers. And we're not going to do anything that without -- that we can do that would disrupt that. So I'm going to give them my top attention just like I just quoted you.

David Solomon said he was going to give his -- the kind of customers he's got his best attention, we're going to do the same thing. So I wouldn't -- I just would not focus on the fact that our concentration is going to go down below 50% from our largest customer.

I don't think that's going to happen for several years because I think they're going to grow..

Okay.

The other question I had is as you think about your longer-term projection for 2019 of that 20% to 25% growth, if you were to significantly deviate from that growth trajectory in any sort of way, what would be the causes of that?.

Good question. I’m expecting would be Matt. We're looking at each other..

There's a lot of different ways you can deviate from that significantly. If we fail to execute, certainly, we'd deviate in a negative way. If we were to get -- as we said before, we got lucky with our current largest customer. If we were to get lucky again and land a big one, maybe we'd have....

A little faster growth. You're still limited by numbers of people. Nobody grows out any people no matter what they talk about in scalability. It's really scale. I think we've proven that really well. I've got other statistics that kind of show that. But I don't really see anything that could significantly cause a deviation from that.

Now I'm wanting to get a little more focused on the next 5 years. I'm not ready to go there yet, so I'm still thinking just the next few years at this point. I think the -- I think we need to probably put another pretty good sized customer on our own processing to be able to get a better projection sale over longer term.

But right now, I'm pretty comfortable -- I'm real comfortable with that..

Our next question is from Avi Fisher with Long Cast Advisers..

Leland, Matt, thanks for all the good work you're doing. It sounds like, from reading the Q and other people have sort of asked about this, you're investing ahead and you've grown your employee base quite significantly. It's up like 2x over the last 2 years to over 900 employees.

It sounds like some of them aren't really allocated to generating revenue yet. And I wonder if you could sort of estimate what portion of that is still sort of not at scale revenue yet..

I would have no way of trying to estimate percentages or numbers there, but it's absolutely true that a good number is not going to be generating revenue yet. I should stick to the business. It takes several years for -- to be able to generate good revenue from the training that we give them.

I hope we end up with a bench at some point that would give a large customer comfort that we could take care of it. So if you're ending up with a bench like that, you're going to end up with 150 people that are not generating revenue. But they're doing things, but they're not generating revenue.

They may be simply shadowing other people who are doing revenue that may be -- and it may be a different kind of allocation. You may have people working 20 hours generating revenue and 20 hours not generating revenue. So it's just -- you just can't clear cut that..

Okay. Asked another way, what -- could you -- your services gross profit margins were at 1 point in the 50% range, and they've dipped from that because of these investments.

Do you expect to get back to 50% -- north of 50% over the long term?.

Gross profit margin, we focus more on operating margins. So we think something closer to high 30%s, 40%, somewhere in that range. There was a lot of overtime involved in getting to those 50% margins several years ago. And as Leland said, that's not very sustainable for our people. And so getting back to that point.

But then the business will be a lot different in the future. The processing revenue will be a higher percentage of the total, and it's still kind of too early to determine what the margins are on that. So it's really just too early to focus on too much on margins, but we're going to stay profitable as we said..

Yes. We're -- I'm not trying to target that. I'm trying to stay reasonably profitable and growing the business for the long term..

Okay. So I guess I can't nail a number down with you. It was just my best effort to understand because with the -- if you just sort of apply that 50% gross profit margin to your card COGS, I mean, you'd be on track for services revenues of north of $60 million a year.

And I just -- is it safe to assume you have your target on a higher number than that?.

No. No. I mean at some point, yes, but not in the short term. I mean you're your gross margins -- I mean how much license revenue do you have there to calculate that? I mean it just distorts the heck out of it..

I'm just looking at the services gross margins, which is all I have -- all I can look into.

But at 30% to 40% operating income, we can infer where this could look like down the road?.

Yes. In the long term. Sure..

And then just finally, and I think you may have talked about this earlier, but are you -- it sounds like you're expensing your equipment and not capitalizing it?.

We capitalize certainly anything that's hardware. For software, it kind of depends on the accounting rules. And so there is a portion of our software that's capitalized certainly..

And that's running through COGS also?.

Well, the depreciation would run through when the platform -- so for example, the new platform we're working on, we haven't started depreciating that because we haven't started using it. So that's -- any costs that are capitalizable, we're capitalizing.

And then ultimately, when we start depreciating it when it goes live, that'll run through COGS, that depreciation expense..

I mean just to clarify, the Q, I think, called out that COGS was -- had increased -- cost of revenue increased because of investments in infrastructure. So I assume that was hardware, or is that....

So infrastructure investments is more along the lines of equipment for increased processing power. And so that's kind of the depreciation related to that would go through COGS..

So not necessarily this quarter's purchases, but prior quarter's purchases, and that related to depreciation..

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Leland for closing comments..

Okay. Let me -- there was a couple of questions send it. Let me touch on one. One shareholder asked about the GM conversion. And I can't really speak to what other people say about the success of it. We consider it -- they want to know kind of how people feel about the industry.

I would believe -- I believe the industry would probably say it was very, very successful. We think it's successful, given what we know about conversion. I've got a fairly long history to understand how big a disaster conversions often are. I mean that's really one of the things that we think we're really very good at, is conversions.

So I will just try to answer it to the extent, that we think it worked very well. So with that -- with the answer to that question, we'll go ahead and close the call. We thank all of you for being on the call, and hope that you're satisfied with the way your investment is going, and we're going to continue just trying to execute at a high level.

Thank you very much..

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation..