Greetings and welcome to CoreCard Q3 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Matt White, CFO. 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 third quarter results were in-line with our expectations. Total revenue for the third quarter of 2022 was $14.5 million, a 12% increase compared to the third quarter of 2021.

The components of our revenue for the third quarter consisted of professional services revenue of 7.8 million, an increase of 12% processing and maintenance revenue of 5.3 million, an increase of 52%, and third party revenue of 1.4 million.

Services revenue, which represents total revenue less license revenue, grew 30% for the third quarter of 2022, compared to the third quarter of 2021 led by 52% growth in our processing and maintenance revenues.

We continue to onboard new customers, both directly and through various partnerships we have with program managers such as Deserve, Vervent, and Cardless. 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 and Simon, which is a real estate investment trust that owns shopping, dining, entertainment, and mixed use properties and is an S&P 100 company.

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 completed the American Express certification process in October and we expect this program to be live later this month.

We are happy to have recently announced the addition of Kathryn Petralia to our Board of Directors. Kathryn brings extensive fintech experience to our Board and was a Co-Founder of Kabbage. A customer that we've talked about previously and that was acquired by American Express in 2021.

We recently finalized a new contract with American Express to process its Amex Kabbage loans and have seen steady growth in this new program. Separately, we continue to service legacy Kabbage loans under the K servicing name. As discussed previously, these legacy and PPP loans continue to run-off as the loans are paid-off or forgiven.

We recognized revenues of approximately 0.5 million for the third quarter from this customer and expect the run-off to continue at a faster pace going forward as K servicing announced its intentions to winddown. I'll now dive deeper into the results for the quarter.

Processing and maintenance revenues grew 52%, as I mentioned, in the third quarter of 2022 compared to the third quarter of 2021 from the recently added customers mentioned above who are now live and continued growth from existing customers.

Revenue growth, excluding our largest customer was 22% in the third quarter of 2022, compared to the third quarter of 2021. As a reminder, we typically charge for our services based on the number of accounts on file, not transaction volume.

As a result, we expect our processing revenues to be resilient during [weak periods] [ph] of economic growth or during economic declines. Turning now to license revenue. As expected, we did not recognize any license revenue in the third quarter of 2022. However, we do expect a new license here in the fourth quarter of 2022.

Professional services revenue remained strong in the third quarter. We anticipate professional services revenue in the fourth quarter in the range of $6.7 million to $7.0 million. We consider this revenue to be repeating as evidenced now by four plus years of significant growth in professional services.

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

Income from operations was 1.7 million for the third quarter of 2022, compared to income from operations of 3.3 million for the same time last year. The decline primarily relates to lower license revenue in the 2022 period. As we've said previously, our license revenue is lumpy and can have a significant impact on our results.

Our operating margin for the third quarter of 2022 was 12% compared to an operating margin of 26% for the same time last year. The decrease is primarily driven by lower license revenue, and continued hiring in India and in our Columbia office that we opened in October 2021.

Our third quarter 2022 tax rate was 24.6%, compared to 26.3% in the third quarter of 2021. Earnings per diluted share for the quarter was $0.16, compared to $0.29 for Q3 2021.

We remain 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 through the third quarter of 2022, we are confident in top line growth expectations of at least 40% for fiscal 2022, compared to our previously provided guidance of at least 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 our shareholders. And with that, I'll turn it over to Leland..

Okay. Thanks, Matt. It's a beautiful fall day in Atlanta with the leaves turning, both on the tree and on the ground, a lot of color. So, let me add a little color here about what Matt said and about the company. By the way, I hope it's beautiful where you are too and have the same smile we do as we look out on this beautiful weather.

I'll give you some of my views on the quarter, and 2022 year to date, as well as a plan of what I expect for this quarter and some for next year. My comments really should not be [interpreted] [ph] as any kind of forward guidance as I'm speculating on how things will unfold from where I sit today, and they always look different tomorrow.

As I said, the weather looks great today, it may not be the same tomorrow. Matt gave you the [indiscernible] for the quarter. Maybe my first comment will be what we could call low lights, and then I'll move on to the highlight cover. And I would say, the low light would probably be considered the expense growth and what may appear to be margin issues.

There's no question, our expenses have continued to grow and they grow actually at a faster rate, compared to our non-license revenue. Most of that growth was planned and it’s all in cost of people. Salary inflation has ticked above what we will expect long-term, but I really don't expect us to moderate until perhaps the middle of next year.

We are intentionally bringing on more people to be ready for more growth in the coming years. You've heard me in the past talk about how long it takes to train to be able to offer our customers and partners the quality, high-end expertise that differentiates us from others.

For some [indiscernible] 18 months of training surprises, but for others, it will be a three-year process. We've now caught up in the sense we have a steady process that will enable us to grow at the steady 20% to 25% rate that I've really stated that should be approximately a limit for a responsible fintech company.

By the way, when I say 20%, 25% I would say over any five-year period that should be our annual growth. There'll be ups and downs. And I'll add just as quickly that 2024 is not likely to grow at that point and more on that comment later. Let me expand on the employee topic a bit more. We now have over 1,200 employees.

I think this month, four years ago, we had about 430 employees. So, we tripled the number moving at a very rapid pace.

How many did we add this past year roughly?.

So far through September, we've added 300, mostly in India..

So, that's a 25% increase, 30% increase already this year. So, I used the word [color] [ph] earlier, mainly to represent how we now feel that we have stable environment for recruiting, onboarding, and training. All of this growth came with the dislocating factors brought on by COVID and also work from home.

I'd say we're also caught up on stabilizing the environment from that perspective with our major current opportunity, big facilities for the employment growth and dealing with the continued poaching of our trained employees for larger companies.

I think I should pause and give a highest compliments and praise to the present General Manager, Anupam Pathak of our India operations for his leadership through this growth. He’s also one of the primary architects of our CoreCard platform and has just done a marvelous job.

I guess some other facts that we shared with the Board yesterday about our employees is that we have a large number of employees who have been with CoreCard for over five years. Actually, many over 15 years, but the numbers for over 5 years are 200 plus in India, 20 in the U.S., and 6 in Romania.

I will have to both as a significant shareholder and also CEO, say I'm very thankful for the royalty and dedication to the success of the platform that they themselves built. Only a good team can make things happen and perhaps of all of the characteristics of an organization such as ours, teamwork is the most important.

We just had a remarkable group of talent, energy, and longevity. With that background on expenses, margin, and employees [indiscernible]. Earlier I alluded to the fact that my prediction of 20% to 25% growth over any five-year horizon would be my expectation.

How does that play into this year when Matt just said, the expected growth this year to be in the range of 40%? Well, it really doesn't change my expectations. In addition to the lumpy quarters, you'll get lumpy years because the way license revenue is booked.

I know some of you are probably tired of hearing the word lumpy, but it is what it is and we make business decisions on what is best to grow the business, not [involving it] [ph] for Wall Street. We're still of the old Warren Buffett's tool just [behind] [ph] the business. We run a business on a business plan.

I suspect that this year is our largest licensed revenue historically and perhaps will be our largest year ever, but when you have a year like that, you could expect that to be lumpy and that poses issues in comparisons.

There's a good chance that we'll get more license revenue in the fourth quarter and if not definitely in the first quarter of next year. I think you would understand if I said I hope it gets delayed in the first quarter as our 2023 first quarter compression will be against this year's very large first quarter of over 12 million.

The [indiscernible] either way. We're likely to hit 16 million in licensed revenue in 2022. And that's why I said, it's probably the largest we've ever had and probably the largest we’ll ever have. Of course, I wish some of the first quarter this year [had come in] [ph] for a quarter last year, smooth better results and make [indiscernible] happier.

But I think you know by now; we've managed a longer-term and take it as it comes. And shareholders who are in steady growth over several years are comfortable with us as we have and we'll deliver those, kind of returns and those that want to manage the numbers for Charter are not going to be very happy.

I can categorically state that we're not anywhere close to the [60 million loss] [ph] in revenue in 2023. Our best guess at this point is that will be between 3 million and let's say 7 million. That leaves a big top line in earning [indiscernible] in 2023, in comparison 2022.

Remember that license revenue all drops to the bottom line in terms of gross profit [indiscernible] net profit really. Can we fill that hole? Surprisingly, filling that hole is definitely possible and possible even to beat it, but that's not a prediction at this point in time.

How do we do it if we do it? Well, currently, we have potential partners that may license or may want to be processed. If they license, we get more upfront. If they choose processing, we have more upfront expense and infrastructure and the monthly numbers just add up over time.

We can't predict our choice to do this time, so I cannot predict how that will play out. There's still another factor and I know that because they told me that this is these costs and that's a company that we chose not to take on is wondering why we did not take them on, if we might have a revenue hole.

The answer to that is that we continue to choose customers based on their strategic value to us over the long haul. We want to devote the scarce resources to the most profitable, long-term value creating opportunities. So, do we have a [mini] [ph] or an enough of those? I'm going to say yes and that's to be put in capital letters in the transcript.

Matt talked about some of the newer customers, each with a particular value to us, and also the opportunities they bring to increase our processing revenues. There are others, in addition to those he talked about that we expect to go live in the fourth and the first quarter.

There are combinations of [indiscernible] with particular needs and large corporations are going to provide cards to their customer base. Large corporations almost always starts small to test our offerings before large rollouts. It's the right way to do it. It's a rollout faster than even I would recommend.

They can fill that revenue and earnings hole fast. What about larger opportunities? We fully expect by this time next fall have either announced or been working on one or two large programs.

They'll either be direct scorecard, or through current partners such as Goldman or through new ones currently in discussion stages brought to us by other current program managers.

We have sufficiently trained and skilled resources to take on two decent sized prospects by this time next year, and probably end up with three or four good sized prospects by late 2024. In terms of current discussions, they're a mix of license, licensees and processing potential customers.

We're incurring the personnel expenses currently to be able to make that happen. Of course, in processing, we will still have to add more infrastructure cost to take that out. We can't take on three big ones successfully next year, while still serving the strategic newer fintechs.

And as I've said before, we will not take on business that we have any questions as to our ability to successfully implement or serve. So, don't expect more than two next year in some combination. Matt pointed out that our process to get maintenance revenues grew 52% in this quarter, compared to last year in the [same quarter] [ph].

Now, I'm not going to project 50% each quarter, but I can confidently say, we'll have significant growth in this recurring revenue line next year even though license revenues will be significantly down. For many shareholders, this is what they want to see and they actually discount the license revenue income. I don't do that, but [indiscernible].

Goldman Sachs is recognizing our filings as our largest customer and the Goldman CEO has recently stated that their customer Apple has renewed their contract until the end of the decade. I expect the Goldman concentration to be coming down next year as we grow the other businesses.

And that does not mean we expect to lose Goldman business, although I've said for some time, don't be surprised if they take a simple card program to a legacy processor in order to diversify the reliance on CoreCard.

As their portfolios and card counts grow, while we serve them well and they remain our number one priority for best resources, we do have growth challenges as they themselves also have. They are a great, highly professional, highly talented organization, and our partnership has made CoreCard infinitely better as a result of that association.

If they were to choose to break another program under the CoreCard platform. And if that program has a current base of cards [indiscernible] conversion, which by the way, we're very good at, we would see more license revenues and perhaps maintain current professional service revenues at the current pace.

If there were a new program, the license revenue would be more spread out with a program growth that we would see in different professional services. I might add that fourth quarter – this fourth quarter with the holidays usually for [indiscernible] and professional service work as you have fewer hours available since people take holidays.

I think a Goldman has stated in their own earnings calls that they want to take 2023 to stabilize their consumer offerings before growing them again. As I said earlier, we're planning on two larger customers by this time next year, Goldman may or may not be one of them, but we can only get two.

I hope I've given you what you need to know as you make your ongoing investment decisions. We're conservative because we want our customers to always be able to trust us. We're a company that believes [indiscernible] construct the contract.

And it's really not unusual for us to suggest before anyone else or the customer brings it up that our terms should be modified and even what's customer pay should be reduced.

We also sometimes step up and may offer you the creditor benefits that we're not in any way contractually, [I'll need] [ph] to do if for some reason we have unilaterally messed up. We want to do what's right even as we become much larger and not hide behind process.

Now, before you as shareholders get concerned with that statement, believing we're easy to rollover. You could just as easily find examples where we are tough as nails because we simply want to get paid for the good value that we provide. Pay us the right amount as agreed upon time.

We simply want to be known as 100% completely totally trustworthy, and we want to be known as that by our actions and not by our slogans. Your choice, if you want to call any best statement with a fact, we still have no salespeople that I'm aware of, the 1,200 plus employees.

And by the way, I say that and end here with a smile as we open up for questions. Still no salespeople among the 1,200 employees he said with the smiles. Operator, you can open it up for questions..

Thank you. [Operator Instructions].

Hey, we're happy if there are no questions because shareholders know they can always call Matt or I to get answers. So, if you don't have any at this point, why don't we just….

We do you have a question that just came through from Anja Soderstrom with Sidoti. Please proceed..

Hey, Leland. Hi, Matt. Thank you for taking my question. I'm just curious if you can talk to, sort of the magnitude you say, you don't think you might lapse the license booking you had this year in the coming years, but you're talking about potentially two new customers, licensed customers at the end of next year.

Can you just talk about sort of the magnitude of those? Are they going to be slowly building up because they are new customers or is it the [transfer] [ph]? So, it could be a little bit larger than just building up from scratch or…?.

Yeah, right now, it's hard to know. We or our partners are talking to something how portfolios that would be converted at the end of next year, first of all.

That means it would be a big lump, but we're also talking to those that are just going to build up over time and we're talking to some that are highly likely to have a relation, but it will be smaller, and may even be international. So, it's really hard for us to project how we're going to fill that hole.

And I know you've got to model this and we'll try to help with what we know, but it's really difficult to know the combination.

Matt, do you have any other comment on that?.

I think your comments earlier about, if it's a processing customer it builds a little slower as they add accounts to the platform. If it's a licensed customer, you get that license revenue maybe more upfront. A lot of that depends on timing though of the go-live, which we know can….

I think what she's asking though is, how much of each are we going to have? And I think what we're saying, we don't know right now. We just believe between the combinations of those who we're talking to that we can – that we'll fill that hole or for that hole, but don't know whether it will be licensed or processing right now..

Okay. Thank you.

And then in terms of the license revenue you do expect in the fourth quarter, is that from both the GM and the Apple or is it just one of them?.

It – well, we don't separate that. Remember, our customer is Goldman. It's not Apple or [GM] [ph]. So the rise in revenue would come from Goldman Sachs, not from….

Just from growth in existing programs..

So, it could be any combination of that growth. [Indiscernible].

Okay. Okay. Got it. Thank you. That was all from me..

Alright. Thank you..

There are no further questions in queue at this time. I would like to turn it back to management for closing comments..

Okay. Thank you, everyone for your interest in the company and we appreciate that interest. And as usual, if you have any further questions that we'll be able to answer, please contact us directly. So, thank you and everybody have a great nice fall day. Bye..

Thank you. This does conclude today's teleconference. You may disconnect your lines at time. And thank you for your participation, and have a great day..