Q1 2020 Earnings Call
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At this time all participants are in listen only mode. After the speakers presentation, there will be a question and answer session.
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No I hand, the conference over to your Speaker today, Leland Strange Chairman and CEO. Thank you. Please go ahead.
Good morning, everyone and welcome to our call today.
I have with me.
That.
Play to ship AUO.
This is an interesting time and I would guess most on this call we're not in their offices.
Matt no physically in the intelligence systems, Boardrooms, where youre typically for callers.
Alright told <unk> and a lot of Corecard officers are both located in the older to bird a distribution warehouses.
Lord signal steroid Motilal tenant building located in Atlanta suburban office and industrial Park.
Indulgences from jobs, just space is one street corporate offices habit interest to the same building, but from a different street.
We all can jolted scorecard is about a block away.
We get plenty of exercise going back and forth inside buildings, although the most efficient path is to go outside one in France like the one another one for poor card, which we do unless it's raining.
The I know, it's all fish consist of less than 10 people were spread out in our own cubicles, social mobile still cover the alters each day.
Corecard employees or somebody else and are generally not coming into their offices.
Our employees or the strength of our company since our heavy abasement in technology over many years would have little by your without the dedication and longevity of these employees.
We implemented a quick and essentially issue free transition plan several weeks ago for a 100% work from home structure, even though were considered in the central Sherbet and could work from our offices.
Let's say 100 per se, but we do have I T resources that have to work sub own satellite.
Outsourced data centers.
I want to recognize a knowledge that I'm blessed to be working and surround it with such a dedicated team who help inform magnificently these unprecedented and challenging times.
I hope this morning that all of you have take the time to read the press release, we put out.
A copy of it is on our website along with the other filings I do want to remind everyone that during the call, including the Q in a bad and I will make certain forward looking statements based on the business environment.
We currently see it if in Dallas about what all that entails. Please see the section on the Safe Harbor language regarding these statements under pressure Lee said in our 10-Q.
Undertakes no obligation to update or revise these statements or the statements. We make today and emphasize are based on routes, but speculation.
In an unknown time.
At this time I'd turn it over the to match. So he can talk about the Naturals, then I'll come back on and give some color Matt go ahead.
Good morning, everyone.
As leader Leland noted in our press release, our first quarter performed inline with our expectations for the first two months of the quarter with momentum continuing from fiscal 2019 towards the last two weeks in March we began to see the initial disruption on the pandemic.
But that said revenue for the first quarter 2020 was 7 million Eone hundred $93000 compared to revenue for the first quarter 2019, a $6.966 million an increase of 13%.
I'd like to remind everyone that the first quarter 2019 benefited from the timing of a $950000 professional services agreement the European customer did not recur in the first quarter 2020.
As we've discussed on previous calls similar to our license revenue the timing of our professional services services revenue can vary from quarter to quarter, depending on when I project is delivered this is why we often say that it's better to look at our results on an annual basis rather than quarterly.
The components of our revenue for the first quarter consisted of professional services revenue of $5.279 million.
Processing and maintenance revenue of $2.194 million and third party revenue of $420000.
As expected we did not receive any license revenue in the first quarter 2020.
Now turning to some additional highlights on our income statement for the first quarter 2020 income from operations was $2.379 million for the first quarter 2020 compared to income from operations of $2.605 million. So same time last year, resulting in an operating margin of 30% compared.
To an operating margin of 37% or the same time last year and 39% for the fourth quarter 2019.
The sequential and year over year decline in operating income was primarily driven by lower license revenue in the first quarter 2020.
Additionally, we experienced higher general and administrative and administrative expenses compared to the first quarter 2019, primarily primarily related to legal costs associated with ongoing Securities litigation.
Research and development expenses were lower in the same time last year, driven by lower accrued employee bonuses.
Our marketing costs continued to remain low in the first quarter 2020.
Our first quarter 2020 tax rate was 28.5 per cent compared to 24.1% in the 2019 period.
The impact of a valuation allowance on tax benefits related to investment losses in 2020.
Earnings per diluted share for the quarter was 12 cents compared to 23 cents for Q1 2019.
Diluted EPS for Q1 2020 includes the negative impact of of 11 cents per diluted share.
Due to investment losses of approximately $1.050 million.
And as mentioned above we recorded a valuation allowance on the tax benefit these write downs.
While the impact of the Cobot 19 related economic slowdown was limited for the first quarter 2020, it's not currently possible to estimate the full potential impact on our business.
However, there are five major areas, where we could see disruption.
First we received license revenue when our customers achieved new active account tiers.
In an environment of slower growth or declines in active accounts, we would anticipate our license revenue.
Second our maintenance revenue is also based on active account to years. Therefore, lower license revenue would result in lower maintenance revenue.
That being said a decline in active accounts would not move customers into lower maintenance tiers.
Third we typically receive processing revenue based on the number of active accounts our customers have on our system.
Our customers.
To add new accounts were experienced declines in active accounts did in activity, we could experience lower growth and processing revenue or lower processing revenue.
Fourth we would also anticipate delays or declines in professional services revenue as well as delays and new customer sign ups and implementations is current customers or potential customers delay or cancel them their plans.
And finally, we could experience higher costs and disruption to our operations in the event the virus prevents a large portion of our workforce from performing key duties.
Our employees in India had been required to work remotely since mid March.
We have maintained key functions. However, the continuance of remote works will likely negatively impact productivity, which could impact operations and revenues.
And with that I'll turn it back to Leland.
Okay. Thanks, Matt.
We're just a few weeks ended epidemic and its economic effects are yet to be determined.
As a wide range of possible outcomes.
Did it impact just in the first quarter it definitely affected us, but you cannot necessarily tell it from a good operating results.
Example of the if that would be.
Future lunched revenues.
I should say timing of future licensing revenues as bad said, a number show the quarter comparison for a year ago has launched in revenue this quarter there was none.
But we actually expected non as we previously stated was possible. So you might ask how does affect the company.
Well remember, we recognized luncheon revenue, what I call stair step fashion.
You get nothing until you reach the niche stair or the next year.
And that's what the pandemic started our end customers, who offer the cards close stores that back to open and advertising and they didn't know you incentives so naturally new activations fell off dramatically.
Well, we expected no Washington revenue the first quarter, we did expect to have a larger number of accounts teed up to recognize more licensed revenue the third or fourth quarter.
Now we may still get it but were behind where we expected to be.
So this is an example, other potential future effect of that pandemic, that's working under the reported numbers.
Everything we do revolves around how well our customers or partners where clients to.
They have their own customers, they dependent corecard to respond to their needs.
Happy to report to shareholders that up to this 40 does.
We really did not Miss a beat as result of working from home you taking care of our customers.
That does not mean, we just get there like running of the processing front.
We received a lot of professional service revenue by providing new features.
Offer. These features are coated tested and put in a lot of environment, but are not released by the customer o'barr customer for much sometimes six months or more.
This work has continued and generally only slowed a little as of today.
I cannot predict whether or not that will be the case tomorrow, but I believe any slowness will be binder and not major.
I cannot emphasize enough our focus and attention to helping our customers make money.
Let me give you. One example of how our team response.
When everything broke loose wonderbra customers, who was within 60 days of announcing a new credit product asked us to suspend the work put it all hope.
We did.
So it really laid off a good number of people.
And then with the payroll predicts protection program was announced they ask us if we can customize their product to be able to offer these loans.
They wanted to quick.
We worked around the fog within four or five days, they were able to take applications for the payroll protection products.
This was important to the customer and therefore important to us.
Hi, Joe team and software framework allowed this Pat this fast performance.
No no show up you are looking to us together intelligence or some.
Oh, how some of our customers are doing.
We're not going to speak specifically about anyone customer you see in our reported numbers that are old prosigna processing revenues have grown in this quarter in comparison with last year.
Our customers are heavy the problems you would expect any credit card issuer to have you can listen the conference calls from Synchrony financial global pay much capital won.
And the messages are all the same.
Transaction volume is down since travel is almost nonexistent.
If your business model is based on number of transactions or amount of total transactions or credit issuance you will have a significant shortfall in revenue.
I, sometimes hear from an Investor rail is why don't you get paid by the transaction or why is your revenue model not built around sharing interchange.
You will note our revenue model is more skewed to number of active accounts, we I'd rather give up the upside that's the other bottles provide and hedge the downside that for body bar model.
You will see list downside in recession and per helps less upside in a boom with our model and I emphasize the word perhaps but this is the reason that our revenues are likely to remain fine. Despite the lower volume of transactions in this kind of market.
I would say in summary, our customers are seeing lower purchasing volumes lower demand for credit.
Lower request for customer, let increases you might take that lower demand for credit and lower credit line increases is counter intuitive, but in a downturn.
But actually during the beginning stages of something like this that control past.
The folks generally get more conservative.
Just pause during a time of uncertainty.
So, let's discuss anticipated effect on our business for the future as I said earlier, our U.S. team is working with the same efficiency is prior to the start of this pandemic.
But the India office is a different story.
India also went into lot deal and we really did have to scramble.
Many of the newer and junior employees did not help laptops nor were they expected are prepared to work from home.
A large percentage of the signal employees were able to quickly adjust and most had reasonably good internet service from home.
They jumped in and perform new ways that had never been anticipated.
Clearly makes me proud how management and employs adjusted almost overnight, but India luck in was decreed.
But there is no question that our overall efficiency suffered as we were not able to provide suitable at home work for many employees.
We don't know today from the employees will be allowed to come back to the office, but we do know when that happens it will be staggered.
I think to very good thing during all of this is that we maintain first class customer support and were able to continue to providing the high level professional services needed and decide bar customers.
But I should add the strain on operating resources is high and problems that are ball take longer and are harder to get resolved.
The effect on potential new customers is really a known as of today as you would expect those conversations have slowed down but have not stopped.
We've actually signed a couple of due process like accounts with the last few weeks.
These are small but prior to the pandemic were expected to grow rapidly.
I expect very slow growth at this point, but it is gratifying to see that continued progress with you processing customers.
Large customer engagements that would in bulk of brochure from rather processor require person to person compensation and that means those have slowed but there's still going.
The Big question that you and frankly, all of us or trying to determine its what does all of this mean for the balance of the year.
It's a question that we honestly cannot answer at this time.
There are just too many open ended variables for us to make an informed assessment.
We've not completely professional services building for April So don't know the true effect for April, but our preliminary view for this quarter and the next few is that our revenues in most categories will remain fine.
We are unlikely to get the growth, we had anticipated and planned for but we certainly don't see gloom and doom.
It's amazing how fast it almost a world could change as a matter of a few wage.
This pace of change also creates panicking scrambling to organizations to deal with the uncertainty.
Our team is also heard me say that the outcome of bidding negotiation is determined in the first any before you even start negotiating.
Likewise, the choices yield made before coming face to face for this new type of business challenge for most management has already pre determined the outcome.
Unlike some companies, we're not scrambling to cut advertising and marketing.
We're not pulling back on outstanding offers for new employees were not panicking over where cash is coming from in order to stay the course, we're not cutting spending that would impact future growth.
But we do remain frugal and prudent.
The ultimate impact from this crisis is very difficult to quantify right now with the duration and magnitude still largely unknown.
We have position ourselves for the long haul and will stay the course as the pandemic runs its course.
We're focused on resin lunch and long term value creation and the choices, we're making today to manage through depend to make and its impact.
I'm sorry. This call has so many generalities and so few specifics, but that's really all the were able to know MBR, but at this time.
So operator with that I'll open the line for questions.
Certainly to ask a question.
When your telephone.
I said it comes from.
Okay.
Yes, I want to ask Matt to expand on a couple of things that folks of text into us in terms of questions that are asking about the.
Primarily the a deferred.
Revenue and how that impacts cash should maybe a little mortgage explanation on that and then also about the lease obligations. The increase can you talk about both of those things for but it will take other questions sure on need on the deferred revenue.
That relates to payments are we received early in the quarter.
For from customers in anticipation of feature services.
So some of our pre some of the payments received from from customers are contractual we often below 50% upfront for our professional services agreements.
In anticipation of providing those future services.
Off and bill or maintenance and advance where the quarterly or annually.
And our customers have the ability to to prepay some of their license revenue.
So you will expect to see that deferred revenue translate into revenue over the next 12 months, Ken can predict exactly when that will be.
Recognizes revenue, but expect to see that primarily in license revenue, but also maintenance and professional services.
And on the lease obligations, we entered into some new leases at the end of the first quarter.
Primarily in our Datacenters leasing new space and our data centers as we continue to build out our processing environment.
So and also affected a question about R&D expenses and how they were down in the quarter.
I'll comment Matt could comment on that too they're actually not as we've said our expenses in total are primarily.
For employees and if it employee is build out for professional service or cost of sales. He goes in those categories. What's not what's left over in reality becomes already because they're all involved in improving the product Matt can you add too.
That little bit sure some of that some of that relates to higher professional services revenue and the inclusion of those costs in cost of sales for the time those employees are spending on professional service agreements.
There were also lower bonus accruals in Q1 or 2020, Alex I think makes sense given this environment.
So we're definitely not cutting back on on any of those things out.
Operator before you you find your next question, let me just kind of throw Sylvia I was thinking about when I talked about we're continue to add employees just yesterday.
We interviewed a another employed for the Atlanta office, but to tell you how things changed he didnt want to come into the building. So the interview to place in the parking lot with everybody standing about six feet apart answering questions I thought that was pretty alaris I wasn't part of that but it sure wish I had had a picture of it that's.
That's a real change, but we continue to add employees the operator with that.
The other questions.
Our next question Mark.
Please go ahead your line is open.
Thank you good morning.
I guess first question is the company's cash balance continued to grow in the quarter going from I guess 26 million in change to over 30 million. What are your thoughts about the use of that cash or do you feel comfortable given the environment, having that largely the cash balance.
I always like to have as much cash as I get Albert built on a better use for it now.
No. We don't have a particular line, what's going to happen would that I like board to grow you could never have too much cash.
And then following up with on Matts comments with regard to the deferred revenue and how that could translate into.
License revenue as well as other revenue being recognized in future quarters on how should we think about that in terms of how that.
It could.
Be realized second quarter online and how I know, it's difficult to forecast how things are going to work with regard to licensing revenue, but is the key here just the number of cards.
That are activated in the next few quarters and how that's going to translate into higher revenue tiers, just trying to put our heads around how to think about the licensing revenue in particular.
It's a little more complex is that it does it is primarily the number of active accounts that are being like softened and when you talk about active accounts. There's the possibility that Sharma accounts will go in active while you activate it another portion of new account. So there is.
So you start we occurred account base you Doug your inactive accounts did you add the new ads to try to see what's the number of active accounts and that's where license less revenue is paid off.
So that number changes in the end of every month, we get that number when it reaches certain threshold and we've met the objectives required technically too.
Get that revenue that's when we account for it and my best guess it it will it will move in over over this year, although it could roll into next year. We don't really held this thing's going live. So that's what we have to be very careful here. We would normally have expected to look all of that this.
Here that under normal circumstances. This is not a normal time and other I had a predict that update what you can do one thing you can read into it is the continents that somebody paid us.
Let's call it a batch for additional lyson tiers, which would mean, they certainly expected the accounts to growth.
Thanks very much.
Your next question comes from the Lion and staff.
Sidoti.
Okay.
Hi, Hi, good morning.
Madden Leland.
A couple of questions from me our first of all.
I was reading that sulfuric leading customers are wildcard.
Issues with their auditors and they're also revisiting some of their relationships with their partners do you think that might have thought often affecting your business are not really.
We don't see any effect of that or our business I think they pretty much guys cleared fed their audit.
What's going to affect US show their business is good what affects everybody in this business a lot of their business was travel Ed we did yet.
Some revenue for their based on transactions, obviously travel transactions are going to zero in Asia.
So it will you bet, so that will impact their view of spending money for professional services that I could see that lightening up on their side until they see so.
Daylight and travel recovering.
And let me if I could follow up on that.
Do you do most of their work with Ford them in Asia or do you can you give any geographic color.
No it would be Moshe mostly Asia Pacific.
Got it perfect again.
And wasting our shelf we're at a school fish hosted in Germany is Minnesota, Singapore, Dubai, and most of the customers. They use sale for processing older higher license software is in Asia Pacific.
Got it.
And.
In terms of your professional services Nina Leland Ormat.
It was professional services stayed pretty steady.
This quarter and you know as you as we are you know.
But into this the second part or do you expect that to stay steady or do you expect some of that to taper off as you know employees work from home, but you know you said your employees are already pretty.
Actively working from home.
Yes, well I you kind of give me a lead into sharply that it's been hard for us too.
I think get people buy into when we've talked about professional services, it's almost like recurring revenue, we say its repeating revenue and.
I always get by Dandruff win win folks want to kind of just dismiss that is not important it's actually very important that kind of recurring revenue if those kind of margins. So as first number two.
I expect it remember there's expectations based on a whole lot of unknowns that they're going to stay relatively several or.
Similar could be a little bit down to be a little bit.
Could go either way, but I don't expect.
See any.
Big drop off in professional services that is very much a repeating type business bad easy tornado bad.
No I don't know anything to add necessarily.
We will increase significantly either.
Downside.
Got it and my last question.
And Leila you touched on that and thanks for providing Thats you know that you guys signed up a couple of new processing accounts and Andy.
In the last two weeks do you expect you didn't mention that you expected pickup in business, but do you expect some of these a couple of these glass to pick up in the back half of this year How're you doing that internally.
Why don't you tell me what the back half of its years go [laughter] Makena.
Okay.
I kit.
I can't say that write down.
Got it.
Got it thank you.
And I will now turn the call back over to management.
Okay, well, we thank you for wanting to.
Here are update.
We usually say if you have any other questions feel free to calls we're pretty happy with the way things are going right now.
And so again, just thank you and look forward talking to you in another three months thanks, everyone.
This concludes today's conference call you may now disconnect.
Thank you for your participation.
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