Q2 2020 Intelligent Systems Corp Earnings Call
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time Airlines will again be placed on musical. Thank you for your patience.
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Welcome to the earnings release and investors Conference call at this time, all participants are they listen only mode.
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I would now like to hand, the conference over to chairman and CEO of intelligent systems Cleveland Strange. Thank you. Please go ahead Sir.
Good morning, everyone and welcome to our quarterly earnings Conference call.
Thanks for joining us.
Before we get started I'll remind you that our comments will include forward looking statements.
We lived the factors that might cause actual results that we will probably spectrally don't and this call. This morning to dip or even materially religious does she filings available. This morning.
Our last call we spoke about the unknown economic disruption.
Our business as well as businesses around the World I'd say, we all hope that measures and suggestion to put in place would be bring a dip back down but at this point, but it does appear to have happened.
We covered we obviously are concerned about the Hilton shaky over employees their families.
And also providing support for our customers and helping our partners was up a natural challenges that they were facing.
I'll speak more specifically just some of these actions later.
Turning to the second quarter results that we released this morning that will discuss those in more detail in a minute, but as I stated. The press release results were in line with your expectations, even though the individual buckets were a little different than our earlier thinking.
I'm very happy that would you take your that were solidly deliberate broker partners.
So with considerable challenges related to lot damage.
Topline growth year over year arranged growth year over year actually never get cash growth from the into 2019, all were posted low for the quarter at a six month period.
We've done this with declining revenue from work hard, which we will discuss more later.
I should also add here, we don't expect to second half to help a shame positive comps were last year.
Because half of last year was very strong.
I think would that intro, Oh, I'll turn it over to met Y or Z O public commentary.
Thanks, Good morning, everyone.
I was Cleveland noted our second quarter performed in line with our expectations as our business model aided us and adapting to our customers evolving needs amidst the challenging environment.
Over 19 pandemic has impacted demand, but our successful delivery of innovative services and products that's helped mitigate the impact.
Revenue for the second quarter of 2021.
<unk> was $8.053 million compared to revenue for the second quarter 2019 of $7.512 million an increase of 7%.
Similar to the first quarter 2019, the second quarter of 2019 benefited from the timing of a 900000 dollar professional services agreement with the European customer, which did not recur in the second quarter of 2020.
The components of our revenue for the second quarter, consistent and professional services revenue of $5.156 million processing and maintenance revenue of $2.673 million.
Third party revenue of $224000.
As expected we did not receive any license revenue in the second quarter of 2020.
Our processing revenue benefited from new program offerings by and large customer, but not our largest customer related to government stimulus efforts.
Now turning to do some additional highlights on our income statement for the second quarter 2020 income from operations was $2.703 million. The second quarter 2020, compared to income from operations a $2.601 million for the same time last year.
One thing in an operating margin of 34%.
Compared to an operating margin of 35% for the same time last year and 30% for the first quarter of 2020.
Okay sequential improvement in operating margin in the first quarter to the second quarter of 2020 [noise].
Primarily driven by lower legal costs in the second quarter of 2020 associated with ongoing Securities litigation.
We continue to maintain a lean cost structure, allowing us to flexibility needed in these uncertain times.
Our second quarter 2020 tax rate was 19.3% compared to 22.7% into that and the 2019 period, primarily due to the timing of research and development credits.
Earnings per diluted share for the quarter. It was 24 cents compared to 23 cents a second quarter 2019.
Yes.
I'd now like to provide a quick update on on our liquidity position our cash balance at the quarter ended June 30, 2020 was $32.316 million compared to $26.415 million at December 31st in 2019.
For the six months ended June 30, 2020 cash provided by operations was $9.714 million compared to cash provided by operations of $5.954 million for the comparable prior year period.
Provides us with significant reserves to both whether the current crisis and more importantly, invest in our future, but deploying capital to girls focused areas. When the time is right. For example, as of today, we've invested over $5 million and our processing infrastructure and 2020.
The impact of the Kobin 19 related economic slowdown continued to be muted for the second quarter 2020.
We have mitigated revenue declines through our ability to quickly modify our platform, enabling a large customer to participate in originating loans from the paycheck protection program. All these programs are limited integration. We're further encouraged by our nimble business model to adapt to client needs. Additionally, our employees in India had been required to work remotely since may.
In March.
We've been able to maintain key functions and business continuity. However, the continuance of remote work will likely negatively impact productivity, which could impact operations and revenues.
As we look forward, we could experience more significant negative impacts on full year results due to future impacts and remote remote work and previously mentioned stimulus programs, which may not continue beyond the initial statuary term of one year.
Our visibility remains highly restricted and we're not able to quantify the potential impact as it and then it continues to evolve.
And with that I'll turn it back to Leland.
Okay. Thanks, Matt.
There's not been a lot of change between our last conference call in terms, so the way the businesses operating.
And on this call I guess in addition to generally talking about to stay the business.
Obviously, you're going to try to answer your questions that shareholders I previously given those and if it but we still have questions left at the end the call. We will open up for some questions.
One of the main questions people have asked.
Is about to work hard situation.
In 2019 work car was our second largest customer.
In the first half of 2020, they were the third largest customer.
But for the full year 2020, they'll probably still be our third or fourth largest customer as we're continuing to provide services and we expect the we have no guarantees that they'll pay us for those services.
As you know and bankruptcy.
They have indicated that portion of the business will be sold.
Most of our revenue comes for the Asia Pacific Group.
While they that may be show issuing revenues are the smallest segment revenues for that Asia Pacific Route remember work hard is primarily a pay much acquirer and we provide issuing software.
So bottom line, we don't know the ultimate outcome of this business, we know and project that under any circumstances that we can ambition or future revenues from bill will be smaller than before.
It's important to us it is not a big material factor in our future plans and probably will continue to be getting revenue from them, but it is simply an unknown and that's the best I can do all that at this point in time.
Yes. The next thing to talk about is the impact of the pandemic.
I think of that in terms of two factors, there's the like down and then there's business prospects.
Lovedale, it's still own in India, and it definitely impacts our ability to hire and train employees.
It also leaves us with your employees, who could do limited work due to the due to the inability to work efficiently from home.
But the senior level team has stepped up and we have to Liberty pet.
I asked about a 90% level compared to where we would be without a lot down.
The senior team is really good and dedicated to helping our customers 24 seven.
The Atlanta, all pushes mostly work from home or there. Although there are team members in the office every day.
Matt or here every day and Weve continued all of our management meetings in person own side.
So there has been very little impact and Atlanta office.
As a matter of fact will be increased the size of the small does on a team by about 25% in 2020.
With several new employees, starting the last three weeks.
So obviously, we have not stopped eventually the business because the pandemic.
So I wish I could think you'll see a fact or the like down on new business.
There is a slowing a conversation but conversations are still happening.
Lack of travel makes it hard good Nick for large business opportunities because you do need they still face and does not or teams to start really give you that in the way that one on one does.
The way and potential customers continue to talk so in no way by applying that business has slowed in a.
In a big ways.
So that's the impact in terms of the pandemic.
Let's talk about a couple of other teach up I think.
Matt mentioned and bus lunch, we have used a good bit of cash this year and building our infrastructure still planning for a really good 2021.
Matt how much cash did you mentioned that we had used is over $5 million as of today as of today over five bigger this year and that's typically a percentage in software.
At licenses and hardware that's installed in our.
Data centers, we primarily used to to yes in 20 and in Richmond, So that's where most of that money is gone we're not using those.
Facilities or that there, but for right now for a customer, but we anticipate the need for that as we build the business for next year.
Well, that's all the abutments I did mention something yeah, Bob what are about a project that were working out in terms of rewriting our software.
There's always say a downside to talking about that but I thought it was important because were ask a whole lot potential customers, how we relate to other.
Other companies well, we relate today as we are as good as anybody out there we think were better than all the legacy systems. So we have very good software now our team our senior management team rewrote this software from by Cobalt system.
About 20 years ago.
15 to 20 years ago. So they have a lot of experience in terms of taking an existing system and then using that newish technologies and putting that in a even better system.
But my view is that you better obsolete yourself before someone else does it. So we started a project innovation team and that's where shown the new employees are coming in to rewrite. It again, so three four or five years from now we will still have absolutely the best software available the business what does that mean.
It means obviously, it's fully adaptable to the cloud in every way.
By the way our software currently runs on the Microsoft cloud whatever licensees users that another license to users on the Amazon cloud.
Actually there are couple licenses that use part of it on the others like cloud. So it's totally cloud ready now it's my core services like but we want to make it much heavier, but really we're setting up teams to look out in the future to look at the newest technologies not once now, but those that are coming down the pike. So the weak.
Continue down that path. So we will continue to spend some money in that regard own building, even a new better system.
I guess the main concern for folks just future business.
Let's talk about that and then we'll take questions.
We held that it processing customers that will be ramping up the latter half of the year.
These are not large customers. So you are not see big pop ups, but they will grow steadily.
We are still selective with the business, we take alone as we want to keep a reputation of offering a premium product with premium customer relationships and experiences.
That means our senior executives work directly with our customers on their product strategies. This is very unusual in this business has enormous to like a sale pick it may should get them up it's hard to customer over to lower level relationship managers, who are not steeped in the business.
We want to keep we want to kind of customers, who value relationships with folks who know the business better than they do it could help bill as they grow their business.
Our future business also depends a lot of the success of our current customers.
We think of our why should customers as our sales force now we bought we've also got a lot of questions about well look at the size of decisive customer or that logic customer and a your depended on what that customer. We don't look at it that way as all we look at deal as they sell for force for Us.
They add customers, we get more license, we get more professional services and we get more maintenance revenues.
I'm expecting good increases in 2021 from our current lessened customers as well as growth in corrupt processing customers.
We have the capacity.
Bob Pagan to take one more large why should come from rate 2021, but not more than one.
I know somebody you think that is not the right method, but I believe that growth rate of 20% to 25%. It's all that we should aim for.
If we want to take good care of our customers that is separately at long term view I'm not saying that it's what we expect to grow next year, but I am saying, we absolutely expect to growth.
So from a business perspective, we're very bullish about where we are we're bullish on what we think are expectations are going to be for next year at if you'll recall about a year ago said 2020 would be a year of consolidation getting ready for growth again in 2021.
Certainly did they expect to go through that didn't make as part of that plan, but I think we've navigated through that will add we were able to continue with.
Sure only the same play we had to by 2021, the Knicks start of the growth spurt.
I think I'll stop there and.
Give you tied to ask questions, where it will take a few up.
So operator, let's polling for questions.
As a reminder, if he would like to ask a question you may do so by pressing Star then the number one on your telephone keypad again that is star one to ask the question.
Your first question is remark Palmer.
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Yes, good morning.
A couple of questions one.
Just on your.
How much is now about the capacity to take on one more large license customer in 2021.
Have you had conversations with potential customers, who could fill that slot have you been approached.
By any companies that could potentially fill that slot.
The answer is yes.
Okay and in terms of.
The the magnitude of those customers in those programs would they be comparable to a the size of your current largest customer.
Or how would they compare.
Yes, good what where we're talking to several folks and we would take all one but you know that there's the possibility we don't get any of those there obviously looking at other and other.
Opportunity is also but in terms of size.
Are.
There are different.
[laughter], it's awfully hard to articulate this good we're talking too.
You know, let's say one that might be all processing.
And that would be a larger customer in one sense. If you look at it yeah. I guess, if you look at over five years it might be similar it could be a little larger.
The other by be Lysa, then it would not be is that that big.
Yeah. It all depends on Oh, where you are those conversations to remember those big ones normally takes several years.
They are looking out for a situation where their current contract ends two or three years from now and they're putting out our opinions or views and they are exploring.
Where there will be so it's really hard to its it's really hard to quantify that the answer is yes, we're talking to people like that just or people interested that and there could be up comparable size.
Thank you and if I could just took in one more the business related to the government stimulus that ERP program was a tailwind during the second quarter.
There's there's obviously some debate and do you see about what the.
Stimulus would look like we did see a that the PPP pre program was continued what does your thinking about the impact from that program in the third quarter in the second half 2020.
Well I think it has potential to still be good on the other hand.
Remember that actually replaced in some cases businesses that were well costs were making loans.
The loan business. The other loan business went away and this replenished is I think that same close respect each some of that loan business to start coming back obviously not nearly double the level. It was before and it's really a wait and see so I don't really have a way to articulate that I think we're going to we'll get if it comes.
That'll be great. That's alone business goes back to some degree that they get where we will get some of that pick up. So hopefully I think what we're thinking is that hopefully there won't be the negative comp to what happened in that quarter between the two of those stage.
Thanks very much.
Your next question is from each block for route of Sidoti and company.
Hi, Good morning, I Leland and Matt. Thanks for taking my questions are a couple of questions from me and first off on a first because on the Brussels insight on I'm, Matt you briefly touched on this and that was the processing was benefited.
By the some of the government stimulus programs could you elaborate a little bit more on that and maybe what the impact is gonna be and the maybe on the back half of this year.
Yes, let me per se, so they'll let that toss up.
Obviously, we have also equally some other processing revenues not just the gabbard revenues and that's us that is ours are.
James as I just answering the last question, we're really not sure how that will have about what Matt any other thoughts on that.
Nothing to add really from what you said earlier.
We do think that into they send it to benefit to us theres, a little bit of a negative offset.
From that customer not making.
Loans under their normal.
Business. So it will be kind of a a wash probably for the second half a year, but thats been a nice pickup for us certainly in Q2.
Got it okay.
To follow up on the are you guys added a couple of Fintech customers in the last several months, where do you see them ramping up or are they getting on board or are they still in the process.
Well, they're getting on board, but.
All of these this do Fintech guys. They all things are going to have 500000 customers, but the fact is there going to have 10000. So you know when they start so nobody is going to be really really be initially.
So.
Hi, I said earlier on I don't expect to second half of the year to help of same good comps that we had the first half the year.
Even though these guys or going to pick up we had some really Dodge license revenues last year and the second half that you want to comment on that sure I'll just add that we do expect license revenue in 2020, most likely in Q4 at this point.
Potential in Q3, but I think our best estimate that we see license revenue in Q4.
Sure.
Our comps are tough for last year, but we will have more relation revenue this year and as Ben said, it's possible is squeezes into Q3 digit almost certainly going to happen would the unless or some other huge upside down but habit is going to shortly happened in Q4, we also.
Our out looking at and next year and believe we will continue to have good license revenue as some of our current customers get more customers that have to pay us more licenses.
Okay, and lastly, obviously on wire guard I Leila you briefly said that Werent. Good was like your third or fourth largest customer I think that's that's very helpful disclosure.
In terms of you said you know the you guys generate revenue primarily from the the APEC region for why.
Are they did they see what are the maybe some of the steps there digging.
With respect to that business, you mentioned, they're selling off pieces of the business due to the bankruptcy.
Well, they've got investment bankers trying to show at all so there's a U.S. portion of the business. It's a huge portion prepaid it's something that fits though is the former city city business that work clip off and that's not we're not processing that part of the business, but they are trying to subtlety APEC business or try to settle up to the U.S. business.
They'll probably all go to different folks they will not be one buyer fall a wildcard they'll probably be us beneath shift a different buyers deliver pizzas.
All right they get so much that's very helpful. Thank you. So much guys. Thank you. Thanks.
There are no other telephone question.
Okay, we want to thank you for taking the time to.
Listen to our plans today as always I ended, saying <unk> or other question your build that not always available, but thank you for your royalty as a shareholder and we hope to be able to continue to grow the company for you. So thank you everyone have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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