Greetings. Welcome to CoreCard's third-quarter 2023 earnings conference call. [Operator Instructions]. Please note that this conference is being recorded at this time, I'll turn the conference over to Matt White, CFO. Mr. White, you may now begin..

Thank you, and good morning, everyone. With me on the call today is Leland Strange, Chairman and CEO of CoreCard Corporation. You will add some additional comments and answer questions at the conclusion of my prepared remarks.

Before I start, I'd like to remind everyone that during the call, we'll be making certain forward-looking statements to help you understand CoreCard business environment. These statements involve a number of risk factors, uncertainties and other factors that could cause actual results to differ materially from our expectations.

Factors that may affect future operations are included in filings at the SEC, including our 2022 Form 10-K and subsequent filings. As we noted in our press release, our third-quarter results were in line with our expectations with continued sequential and year-over-year growth in processing and maintenance revenue.

Total revenue for the third quarter of 2023 was $13.4 million, a 7% decrease compared to the third quarter of 2022.

The components of our revenue for the third quarter consisted of professional services revenue of $6.4 million, processing and maintenance revenue of $5.8 million, a year-over-year increase of 10% and third-party revenue of $1.2 million.

The 10% year-over-year growth in processing and maintenance revenue was driven primarily from recently added customers who are now live and continued growth from existing customers. That growth was offset by a decline in professional services revenue due to lower demand for development personnel from Goldman.

We did not recognize any license revenue in the third quarter of 2023. Our best estimate on the timing of the next license tier is sometime in the first half of 2024. We continue to see nice growth from all customers, excluding Goldman, which was 18% in the third quarter on a year-over-year basis.

This growth has come through continued onboarding of new customers, both directly and through various partnerships we have with program managers. As in previous quarters, we currently have multiple implementations in progress with new customers that we expect to go live in the coming months.

Turning to some additional highlights for the third quarter of 2023, income from operations was $0.4 million for the third quarter of 2023 compared to income from operations of $1.7 million for the same time last year. Our operating margin for the third quarter of 2023 was 3% compared to an operating margin of 12% for the same time last year.

The decrease is primarily driven by lower revenue and higher costs from hiring in India and in our Columbia office that we opened in October 2021, in addition to continued infrastructure investments in our processing environment.

As discussed previously, we are working on the development of a new platform, a portion of the costs associated with this project are capitalized. Anything not capitalizable under the accounting rules is expensed to development costs.

We have incurred pre-tax development expenses of $1.2 million through the first nine months of 2023 and $0.5 million in the third quarter of 2023 related to this project. Our third-quarter 2023 tax rate was 24.5% compared to 24.6% in the third quarter of 2022.

Earnings per diluted share for the quarter was a loss of $0.03 compared to income of $0.16 for the third quarter of 2022. And adjusted earnings per diluted share was $0.09 for the third quarter of 2023 compared to $0.16 for the third quarter of 2022.

And that adjustment excludes the impact of an impairment on a cost method investment that we recorded in the third quarter of 2023. Our operating cash flow for the year through September 30, 2023, was $18.3 million compared to $10.9 million for the 2022 period. We plan to use this cash for future growth, potential acquisitions and share repurchases.

As noted in our press release this morning, for the full-year 2023, we expect growth in services revenue to be approximately flat in 2023 compared to 2022. The impact to revenue in the fourth quarter are primarily driven by lower expected professional services revenue from Goldman and by the loss of a customer in the parking app space.

This customer, ParkMobile, was acquired by a larger competitor recently and has now been fully integrated into their parent company. We were the program manager for this customer and therefore, recorded the interchange revenue generated from their program as gross revenue and any related costs as cost of services.

We generated approximately $40,000 to $45,000 of processing revenue and approximately $0.5 million of third-party revenues and costs on a quarterly basis from this customer. We do not expect any related revenues or costs from this customer in the fourth quarter of 2023 or future periods.

We continue to expect strong growth in processing and maintenance as our customers continue to grow and as we continue to onboard new customer. We anticipate professional services revenue in the fourth quarter of 2023 to be in the range of $6 million to $6.4 million.

The lower expected professional services revenue reflects the change to our Goldman contract, converting a portion of the revenue to a fixed monthly fee and lower development professional services from Goldman.

As a reminder, we converted the managed services revenue we received from Goldman to a fixed monthly fee of approximately $1 million, slightly lower than the run rate for the first six months of 2023.

While the partial conversion to a recurring revenue structure is beneficial from a visibility perspective, it will result in lower services revenue for the remainder of the year. With that, I'll turn it over to Leland..

Okay, thanks, Matt. I'll just probably emphasize a couple of things Matt said and then probably turn it over to questions. There are not a lot of new things to talk about. Investors wanted us to lower the concentration of rewarding this customer. We did it, but not the way I would like.

I said, let's lower it by just keeping the revenue we have from them and putting other revenues. Well, we did grow other revenues and that's, again, I've said several times, that's where you ought to look at the company. Are we growing the other revenues? If we start growing those, then there are problems.

If we keep growing those, then we've got a great future long term. The Goldman cutback in professional services was simply a part of their cost cutting. If you've listened to their earnings call, they made it very clear.

They are going to try very, very hard to get the platform solutions division profitable and quit losing money and they just dictated all the way down to just cut expenses everywhere you can. So we ended up with a part of that. We do have that longer term of two-, three-year contract for $1 million a month for managed services.

But professional services are bearable and they can wrap those up or they can cut those back as they wish. And apparently, it's also going to cut back. We're not immune to what happens in the environment, both Goldman as well as fintech generally. And I would say the private fintech market might be ripe for a shakeout.

And I think we're in a good position of looking some of that. We're good in assist. We've got almost $32 million in cash. The cash flow is fine. So we'll continue pretty much doing what we're doing, which is growing our processing business outside of the Goldman business.

I guess I just mentioned, we have bought back up, I think $1.5 million worth of stock in the first nine months. If we had known what was going to happen with the Goldman professional services, we'd have been better stock pickers and probably bought it back at some of the prices in the mid 20s that we bought it at.

We may be back in the market in the next -- in the month of December, if the stock takes a big hit. That's because we're very comfortable with our long-term outlook. And we'll just have to settle through the Goldman issues here and then we'll continue what we're doing. Yeah, I don't have a lot of additional comments.

I think Matt covered about everything. Maybe I will focus on one thing. He mentioned that we had third-party revenue. I think you said about $1.3 million from ParkMobile and that is going away completely. That was very, very little profit, but GAAP accounting requires us to put that on the top line as revenue.

It's a program we entered into many years ago that we knew it was not going to be a highly profitable but wanted to do with us to expand our services.

So that goes away not because they left us, because they didn't like us, but they were bought by much bigger companies who has the ability to take care of this little part of what they were doing with us that they couldn't have done with their old platform in the past. So that will be a hit to revenue, but it will not be a hit to profit.

I will say that we continue to not expect -- well, we're no longer really expanding in terms of employees at this point because we're going to have extra resources as a result of using fewer at Goldman. But we're not growing the base.

We have, I think, 1,060 employees in India as of the end of October, that we had a few more than that the previous mark. We don't expect that to go down very much, but we can use those with the other customers that we're working with. And with that, I'll just see if there are any questions.

And as usual, we're always open to along the way once you've had time to digest the Q and the reports and have other questions. So operator, let's turn it over to questions..

[Operator Instructions]. Thank you. We'll be now be conducting a question-and-answer session. Hal Goetsch from B. Riley Securities..

Hey, good morning, guys. Thanks for the call. I wanted to start with two questions. One is additional banks.

What is the kind of environment we've had with the turmoil in the banking sector done to your pipeline? And as it relates to that, with a new platform coming out maybe next year is that our prospective customers are waiting for that platform to come out? That's my first kind of side questions..

Yeah, no one's waiting on the platform, right? They just wanted to get the job done. The platform is for something else, but I will emphasize, and thanks for the question, the fact that we're going to continue to work on that and add more resources to it.

It will be at least another year before it gets out completely, but no one's waiting on that platform. And so we're growing the other part of the [indiscernible].

Okay..

Any other questions?.

Yeah. On Goldman, could you just kind of recap, did you say right now, the contract is a two- to three-year contract at $1 million a month.

Is that kind of roughly what you guys said just a few minutes ago?.

Yeah, for the managed services piece of it, which is a portion of the professionals. Two years -- two more years on that, around $1 million a month run rate and then the maintenance contract, which is a part of the license agreement that goes through June 30, 2026..

So what's the big variable is professional services and --.

Related to development..

Which is development and other things that might be platform related from their standpoint, things they want to see done. And that that could end up being from $300,000 a month to $1 million a month. So it's very much more variable so that they want to keep it down on the lower side now..

Okay, okay. More on--.

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

Okay, okay. All right. And in general, it's like card issue. I mean, if you look at Mastercard, Visa, even the AMEX, you know, these giant platforms continue to grow cardholders, you know, mid to high single-digit year over year. So the backup for card issuances globally appears to be really, really good.

And just wanted to get your thoughts on banks that you're serving, what's kind of the risk appetite to continue issuing the credit right in this time period?.

I mean, you're right. Card issuing is still growing. And I've said before that in a bad economy, you may see the number of cards increase and decrease. You simply see more delinquencies and you see maybe a smaller credit line, but you don't ship your cards. And we typically get paid on number of cards.

So we're not concerned about the dollar value of what goes on in cards. We're concerned about the number of cards. We don't see any decrease in that.

What we we do see is some of our customers that -- or people that we talk to, they already have debit cards and we're thinking about getting the credit card space, they are slowing down that process because they're concerned about the delinquency side.

But people who are already in the credit card space issuing more cards is not a problem as long as you manage the onboarding in terms of scoring, but there will be an increase in our. That's not slowing down.

There's a, I guess, opportunity to, again, I appreciate the question because it has kind of -- chance to think about something else and that is number of cards. I don't want anyone to take away from this, the fact that we've not had any license revenue since the first quarter of this year, which of course, does impact a lots, since that's all profit.

But that doesn't mean that the Apple program has slowed down. Remember, Goldman has two programs. they Apple and General Motors. And the reason that we've had no more license revenue, we have shifted the fact that the way we did -- we get paid on active card numbers. And active card members have different definitions for different folks in the business.

If you were at , you may have one definition for active cards. But then you get also get paid for inactive cards. But this is a licensed deal with Goldman, so we don't get paid for inactive cards. We get paid for active cards.

Now the active card definition says, if a card is not a hit by some system, meaning somebody went to change the address, they went to make a purchase, they went to change credit limit. It didn't really have to be a purchase, change the open-to-buy limit.

That's still active if you do that with a certain month period, right? You define a month, but let's say it could be three months, four months, five months, six months of it. So they discovered that they were hitting a lot of cards -- made more cards for things that they didn't really need to hit them with, probably by with an API.

And therefore, they were still keeping them active cards. And so when they manage their cost well, they look and say, well, how can we not make those cards active since they have been buying anything anyway, in some case, years. So they did that. So therefore, it's taken a while for that to catch up.

As Matt said, we expect to get license revenue in the first half of next year again. Hopefully, the first quarter, it could push out to the second. But the bank card program Goldman has is really good and continues to grow really well.

And we'll get back on track with that next year, once we're caught up with these, this sort of cleanup of cards that have gone inactive now. By the way, I added to that to your question simply because I felt like I need to make that explanation, so people don't go with the wrong. , there's big program is not growing.

It's growing, it's growing well and doing very well..

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

Right, that's right. But you can really think of it as almost a one-time cleanup. Now of course, you all can continuously but it was a one-time period they clean up that won't happen again..

Okay.

And that was a Q3 event?.

Yes, that's right..

Yeah, yeah. Oh, yeah..

Okay, okay. All right, thank you..

As came into the office this morning and said, dang, it looks good, but yet, it looks so good. I mean, it looks bad. It wants us, but it looks so good. We're fine the way we see growth going longer term here. And with longer term, we're talking about next year, whatever.

But we've had a couple of these things that have hit us like the ParkMobile and likely, you'll cut in professional service revenue and then the cleanup of cards. So those are short-term things that we're comfortable with the rest of the business sort of growing.

Yeah. Okay, great. I'll get back in the queue. Thanks..

Thanks, Hal..

Thank you..

Your next question is from the line of Avi Fisher from Long Cast Advisers..

Very good morning. The 10-Q calls out expectations that 4Q will see some, at long last, possibly some marketing spend.

Can you sort of offer some color around that? How much? What's it for? Why now? What's the appropriate expectation on a payoff from that?.

Well, yes, we finally have a salesperson who came from a competitor. So got experience in the business and they'll be focus on selling financial institutions. So it will -- it would not be short term.

They'll be calling on financial institutions who, in many of them, it will be like credit unions or smaller banks, who either have a credit program with someone else or want a credit program. So they'll be looking to try to generate business through that process. Now, again. you're free to tell me you waited too long, Leland. And I will accept that.

But I certainly more than sense that the economic environment changed, I think, faster than any of us expected based on the in our resulting. That put a hold on a lot of folks, a lot of people in banking. Now I didn't expect that. We do have it. So we recognize reality.

And we now have a Vice President of Financial Institution partnerships, FI partnerships..

All right.

And what you're saying is if it's a long-term investments, don't expect anything in the near term on that?.

I would be very surprised if you get anything from that in 2024, but I would love to be surprised..

Right, okay. A few other quick questions. You called out the non-Goldman revenues, roughly $5.1 million apparently.

What are the margins on that? Or if you can't just break that out, how does it compare to sort of 30% gross profit margins blended?.

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

That's pretty low revenues to be 30%..

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

And in your expectations, I mean, I think you gave out some guidance. What is the, if you said it, I apologize if I missed it.

What's the -- did you guide to what the ex-Goldman revenue growth should be next quarter?.

We didn't talk about it next quarter. There will be some puts and takes. You talked about the ParkMobile, the revenue and costs that will go away related to that. So there'll be some caveats, but we didn't give that specific number for the fourth quarter. But it will be -- I would say, high single digits is what we expect..

Okay. And finally, there was a jump in deferred revenue on the balance sheet, which tends to bode well.

Can you just discuss or disclose a little bit around that? Does that lead to future revenues? When does that hit, et cetera?.

It'll hit over the next -- within the next 12 months and most of that is just related to timing of payments. So some customers paying invoices a little bit earlier for services that we've invoiced for, but haven't yet provided. So a lot of that will come. Some of that will come in the fourth quarter, but a lot of it, most of it will be in 2024..

And is that new customers or these are existing customers and just timing issue?.

Existing customers, just timing..

Okay, thank you..

Thanks, Avi..

[Operator Instructions]. Thank you. At this time, we have no additional questions, and I'll turn the floor to management for closing remarks..

All right, well just wanted to say thank you, everyone, for your continued interest in the company. And if you have other questions, as I always said at the end, please feel free to contact Matt or myself. We're happy to answer the question.

And we're very pleased with where we're headed long term, even though we're disappointed with some of the numbers point out. But either way, we're going to keep doing what we're doing, even though we've now added a salesperson. So thank you, everyone, for your attention and we'll be talking to you later. Thanks..

This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation..