Q1 2024 CoreCard Corp Earnings Call

Participants

Matthew White; Chief Financial Officer, Secretary; CoreCard Corp

Leland Strange; Chairman and Chief Executive Officer; CoreCard Corp

Hal Goetsch; Analyst; B. Riley Securities

Avi Fisher; Analyst; Long Cast Advisors

Presentation

Matthew White

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'll be making certain forward-looking statements to help you understand CoreCard Corporation 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 our filings with the SEC including our 2023 Form 10-K and subsequent filings.
We'll also discuss certain non-GAAP financial measures including adjusted diluted EPS and adjusted EBITDA which is adjusted for certain items that affect the comparability of our underlying operational performance. These non-GAAP measures are detailed in reconciliation tables included with our earnings release.
As we noted in our press release, our first-quarter results were in line with our expectations with continued year-over-year growth in processing and maintenance revenue. Total revenue for the first quarter was 13.1 million, an increase a decrease of 11% year over year, driven by lower professional services revenue, primarily from our largest customer, Goldman Sachs.
Components of our revenue for the first quarter consisted of professional services revenue of 5.8 million, processing and maintenance revenue of $6.2 million and third-party revenue of 1.1 million. As expected, we did not have any license revenue for the quarter. Goldman represented 59% of our revenues for the first quarter of 2024 compared to 73% for the first quarter of 2023. Processing and maintenance revenues grew 13% in the first quarter on a year-over-year basis, primarily driven by the acceleration of 0.5 million of revenue from a customer that was acquired in 2023, formally terminated their contract in the first quarter of 24. Revenue growth, excluding our largest customer, was 21% for the first quarter on a year over year revenue growth in our largest customer and the impact from our global business and the 0.5 million of accelerated rated revenue in Q1 2020.
For previously mentioned 41% on a year-over-year basis as expected to be that for the full year, we continue to onboard new customers, both directly and through various partnerships. We have with program managers. It deserve urban and cardless As in previous quarters, certainly aligned with the progress customers. We expect to go live in the coming weeks, including our commercial, our partnership with the Bank of California.
Turning to some additional highlights on our income statement. First Quarter four income from operations was $0.5 million compared to 1.8 million for the same period last year, our operating margin was 4% compared to an operating margin of 12% same period last year. Year over year decline in our operating margin was primarily driven by continued investments in our new platform and lower professional services revenue income statement impact of our new platform builds. It was 0.7 million in the first quarter of 2024 compared to $0.4 million for the prior year period. We made some headcount reductions in India related cost savings starting in the third quarter of 2024. We will continue to look for cost savings as needed to remain profitable given the lower revenues we're currently receiving from our largest customer, our Q1 2024 tax rate was 25.7% compared to 24.7% in Q1 2023. We expect an ongoing tax rate between 25% and 27%. Earnings per diluted share for the quarter was $0.05 compared to $0.15. We wanted 2023 adjusted diluted EPS for the quarter, excluding stock compensation expense, credit teams you wanted 2023 adjusted EBITDA was 1.7 million compared to 3.5 million in the first quarter of 2023. We have over 24 million of cash on our balance sheet as of March 31st, 2024. And we expect to continue generating operating cash flow and 2024. We plan to use this excess cash and cash generated from operations. We continue investing in our new platform and to continue buying back share, especially at current price levels. We repurchased 134,650 shares in the first quarter of 2024 for 1.6 billion. We have approximately 13 million remaining in our current share repurchase authorization for the full year 2024, we continue to expect services revenue to be approximately flat to 2023 license revenue to be approximately 1.4 million, likely in the fourth quarter of 2024. As mentioned earlier, we expect growth from customers living, our largest customer impact of our mobile, the legacy KEVIN business and the 0.5 million of accelerated revenue in Q1 2024 be in the 15% for the full year. Within services, we continue to expect growth in processing and maintenance as our customers continued to grow and have stayed onboard new costs. We anticipate professional services revenue in the second quarter of 2024. It'll be likely in the range of 5.7 to 6 million.
With that, I'll turn it over to Leland.

Leland Strange

It takes place. I've I think the credit, as you shared the quarter was pretty much as we expected that to be the result simply a little better, the breakeven. And I think I expect similar results for the next couple of quarters of the six number rather than a direct answer that will maybe a little better what might be a little worse. But generally, I would say some of the next two quarters hopefully achieve significantly better in the fourth.
But the next to be similar. The elephant in the room is it has been our largest customer, Goldman Sachs variations of revenue for them, along with the question about what's going to happen in the future becomes the unknown.
Let me address that for reported. Actually, obviously, things are coming from our continued increasing the revenue from this segment. That's outside of the largest customer ever wish know what's going to happen with the government situation since they are pretty much announced that they're getting out of the business. I want to say very clearly that I have no inside information on that. What's going to happen, if I did, I could talk about it. So everything I say about it speculative from my view is now back up, but anything definitive that comes from the customer or any conversations?
First, I do expect the General Motors card that's being processed on the CoreCard platform at Goldman that it will go to another party either the fourth quarter this year or the first quarter next year, Wall Street Journal speculated yesterday or a couple of days ago that Barclays is funding for that card again, I would emphasize that even that Oracle was speculation and it includes antibody or anyone that said, that was definitive. It really doesn't matter where the receivables go from a CoreCard perspective, it's highly unlikely that we'll continue to process that portfolio since it's a very plain card with no special requirement. Any process or it could probably pick data itself is fairly easy in as a card. So I know I just don't see the real problems with that of the other card.
The Apple Card is different. The applecart is one that is much more difficult. It has a lot of specialty kinds of things to it. So therefore, I would expect that not to be as support to move somewhere else. And there is again, speculation that it will go to a new bank either either the end of this year or early next year who asks a speculation. There's speculation that a new bank will be chosen. It's my opinion that that is going to be choppy between Apple and a new bank. And it's not necessarily a Goldman decision, although they are obviously part of it again, we have no insight on that. We simply cannot do what we do every day and we have to go live with whatever happens. I would also speculate that probably from a from today. We're still going to be processing that card for the next two or more years could be a long time. Again, we have no definitive answer on that.
Akash we get closer to.
Well, what's going to have what's going to happen is that we should know. I'm just telling you we don't know. We can't know. And by the way, when I do know, I'm probably I have to say I can't discuss it. So that's good with the clue that I'm I know, but did I get it? I think we're surely not going to give it give any information out about our customers beyond the next leg of that is look into the future.
Well, we've got a handful of folks that we are talking to that are what I will call potential strategic customers know what their strategic main strategic means that either there have the potential or are very large or there would they want to do or are doing a product that will extend the CoreCard brand and will help us get into new markets or perhaps still progress?
Well, the strategic nature of the customer. It means that everybody at CoreCard all 1,000 employees know that when that customer calls or what that customer wants, we're going to jump at it. And that's going to that's going to be the number one priority. That's what happened with the Goldman. I got right when they were strategic and now is simply all going as opposed to something strategic. You can't have a handful of strategic partners. You can only have in my view, two or three. We have one right now. I'm I call I call the Banc of California, a strategic partner. They have card leadership that wants to be innovative. They're willing to to do innovation, and they help us together come out with a commercial card that we take the market is going to walk. So once that gives guests live, you will see us. I'm actively promoting that card. They haven't introduced yet, but I think it will be introduced in the next month or two. So that's a strategic partner of the handful of people we're talking to, I hope to get again to more because the maximum we could have is three and we'll be treating them the same way, all as everyone is reported. I hope what I hope are two of our Volta have already have significant revenues but we're talking to I said, a handful of them that have significant revenues that do not have the potential to be significant partners. So we're looking and really spending our time thinking about the non government business and we are going to be manage our expenses toward that and simply that's where the resources will go.
Let me just make a comment. I think last about what's happening in the business in general. The business in general is there's a little bit of cap rate because of regulators that CoreCard has always taken the approach that we work for the regulators. We work with OCC. OCC awarded for the FTSE, whoever is controlling regulating the bank, and we weren't for the cardholder. The other area of the cardholders happy that you'll have the regulatory issues at the bank. So a lot of it in fact, is we work for the regulator and recently the regulators have issued consent orders to a good number of banks that have been sponsoring Fitigues. The reason for that is they've been lax in program management and they've been lax in terms of the money laundering and know-your-customer type activities. So the banks have a bad day. I've read out or provide to a program manager. And up to this point, the banks, as said, has delegated to the program manager, you take care of AML and we're cutting. Are you doing it right? Regulators have come back into the banks and said, No, you can't delegate it they can do whatever they do, but you buy you are responsible totally. So that has all of a sudden calls a good number of banks to have to say we're taking a pause until we reach kind of reorient our compliance procedures to take care of what the regulators are saying at this point. So that does that, that does new fintech type capability. On the other hand, the folks that are already out there that are not new fintechs are due by no regulatory issues. They are those the ones that we are tending to approach approach at this point.
So with that, let's just open it up to questions. That's about view of where we are now. What's happening in Canada.

Question and Answer Session

Operator

(Operator Instructions) Hal Goetsch, B. Riley Securities

Hal Goetsch

Good morning, guys.
I wanted to ask you about what you mentioned towards the end of this call, and that is the potential for one to three strategics, and you mentioned one or both might have significant revenue.
Does that mean they would they would bring a cards that they already have on your platform and that would be the new processing platform for our existing portfolio?
Or could you help us understand a little better?
Thanks.

Leland Strange

Yes, that will require two version. We're very good at conversions. We've got a good history of that. That's obviously one of the issues with folks, but we have a really good history. And as we have no hesitation in taking on the project of converting a portfolio. So yes, that again, that makes us lumpy. If we get one of those now something I didn't say and I should mention here, two of them do not have contracts that they had with their current processor until as a one in June of next year, one in October of next year, but they'll make their decision by June to October of this year, but the and we will start working probably 12 months before that contract ends. But the revenue would come in until the pure choice 2025 revenue.
Okay. Okay. And then on new and on the on the fintech issues with on the compliance side, is the fintechs you're working with, you mentioned deserve it and cardless or are they in that camp be taking the pause when they order they have their oh, yes, go ahead.
No, no, no, there are for it. We're having this digital journey if there are customers that currently exist, I don't have that problem, but none of our customers have a problem. But as I think about it, they are dealing with some of the banks that have gotten consent orders. But all that means for the bank they can't take on, but they're just shopping until they get their sites. So it's not impacting to my knowledge, any of our current customers who are looking in this sort, make sure I understand kind of the is that and basically you X per month expect this one and cancellations.
Right, in-park mobile, you expect your processing revenues to be up 10% to 15%. Is that right? Or everything will air all revenue every day to 50 and now Antonio to actually go bucket major shopping that may make, you know, there was at that time or 1,000 that we put in this year is a little shy previous customer who is only paying us minimum understated only gone live with friends and family, and they got purchased by a another processor. So the other processor obviously wanted to get them out of their platform, not ours. So they took it off now that through Elite, we looked at it, should you just continue to spread that over the term of the contract, but really the features and Matt determined that we have no more services to provide. So therefore, we're going to have to take it all in the first quarter. That's going to make it difficult owned sub forward comparisons for the next couple of quarters, but that's a 500,000. That was a one-time decrease. We're not going to get now. We expect a decrease of other places we expect out of some cost savings. So that's why I said earlier, I expect over the next two quarters to be similar to this quarter. But that's a that's a big Micah.
Okay. Thank you.

Operator

Avi Fisher, Long Cast Advisors.

Avi Fisher

Hi, thanks for taking my question. I hopped on a little late did you mention anything about expectations of license revenues this year, $1.4 million likely in the fourth quarter.

Leland Strange

It shows possible net met and has, let's say, different a little bit in terms of predicting it, but it's possible.

Avi Fisher

Okay.
And then and then two other quick questions. So do you generate any one-timer for our excess revenues as the General Motors card leads?
No, because there is there any special work you have to put enough?
I mean, there might be a little bit of work, you know, in terms of the conversion off of the platform. We haven't assumed anything at this point. The timing is still pretty uncertain as to when that might happen.

Leland Strange

I wouldn't expect any big degree. So that was obviously a rebuild just offset some of the other professional services that we're doing with the floods.

Avi Fisher

And then and then within that General Motors, it doesn't doesn't change your contract with Golden or they're still going to pay you.

Leland Strange

And based on that contract, it doesn't change our contract with Goldman Sachs.

Avi Fisher

Okay.
Can you talk about the revenue generation on these strategic opportunities. So for example, you have a processing customer, they're going to pay you over time on monthly accounts. So essentially on day one, you're not getting paid a lot, but if the card is successful a year or two out, you start making a lot of money, a lot of anchor at a high incremental margin. And so what is the revenue generation and margin profile of a strategic before it starts before it goes live in before those monthly accounts start accumulating, this transition are so different.

Leland Strange

I can ask the question. I'll give an example back in California strategic revenues, basically nil at this point, it will grow a tad, but it's nil. So so they're all all our different all five or six we're talking to differ the two or three or the two I can only take two strategic, really the two that we get, I get it. I can't predict which one will get in some cases, it will be some revenue immediately, but that's not until their contract. It expires as they go live next year. There may be a little we're talking to we could get a significant chunk this year. If we get that would now each of these parties a buyer paid yet, and we're not going to lose them to somebody else but they may stay with their current provider. So I'm not sure I want to get out there predicting revenue from them.
Sure.

Avi Fisher

That's fine. But just so I understand. I mean, you bring on board, say, Banc of California, you have to spend professional, you have to spend money to set up set up the platform for them.
And you don't generally are Western evaluative sales already historical, we're spending money to repay every bus outlet and it's not just interest expense. We're not building it up and amortize. It might be a tiny bit of that. But generally, we're trying to be very conservative on it. So it won't be, but I think naturally there is a little bit sooner, but we're working on that every night every day?

Leland Strange

Yes, everything we've done is primarily historical, and we expect a public launch in the coming months on that. So most of those costs have been incurred already. The balance sheet hasn't changed significantly over the last 12 months in terms of what we've put on related to those costs we've incurred.
Right.

Avi Fisher

So just so I understand, though, ahead of a launch of a strategic, your margins will be lower because you're spending money and not generating any revenue off of it and then the launch. And if it's successful margins, go up because you're generating revenue without a lot of incremental costs, kind of the right way to think about it and a lot of those those costs incurred.

Matthew White

So similar to like if we charge an implementation fee that's going to go into the deferred revenue line, the costs associated with the getting ready for a new launch also go onto the balance sheet into a deferred cost bucket, which has never been significant, never been really, really a separate line item. So it really isn't a huge margin impact as you're describing.
Okay.
Well, what it.

Avi Fisher

Can you then talk about the opportunity to grow your EBITDA margins and again, the way we're eventually strategic, we're just not looking at margin there and we're looking at future potential and not none. It certainly ourselves about percentage margin.

Operator

There are no further questions at this time. So this will conclude today's conference. You may disconnect your lines.

Leland Strange

Yeah, let me just kind of give a give a quick summary. Just to say we are very optimistic with the potential we have for 2025 to be a good growth year outside of our largest customer. The customer, as I said already, I don't think we'll be in a position to be very definitive on that until late third quarter.
And another note I missed earlier, but Matt did mention we continue to invest in the new core density, our core file platform. That's slated to be available in the fourth quarter of 2025.
If I if I were to take a look back at our strategy, how we had planned of Goldman Sachs being a partner that was going to bring additional plateaued and we've been building a bench to take care of that growth. We were counting on growth to come from that partnership would that be the number one partnership or the number one strategic customer when they decide to exit the business, we really were not prepared to immediately ramp up business development and I'm going to have to acknowledge that it was my mistake. I believe that the partnership would be sufficient for our future growth. Actually, I should say it would have been sufficient for growth if they had not changed course, but they did. So now we're dealing with that. We're managing expenses. We have new products coming and we have a good number of prospects that we're talking to draw. I realize there's a period of uncertainty, but I'm pretty confident that we have the only modern revolving card platform that's not in the hands of the multibillion-dollar companies that's going to survive over the long term?
Well, we're ahead. We're pleased that those of you that our current shareholders remain shareholders. We're happy to continue the dialogue with anybody that would like to talk to us. Thanks for being on the call today. Everyone.