Q3 2020 Intelligent Systems Corp Earnings Call
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Thank you for standing by welcome to the Intelligent Systems Corporation earnings release, and investors conference call at.
At this time all participants are in a listen only mode.
The speakers presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please.
Please be advised that todays conference is being recorded.
Claire any further assistance please press star zero.
I'd now like to hand, the conference over to your speaker today, even strain revenue.
Im CEO of intelligent systems Corporation. Thank you. Please go ahead.
Hi, Thanks, Good morning, everyone and welcome to the intelligence systems third quarter earnings call.
Thanks for joining us.
I've met wider she'll phone picked a date public call me I'm not sure whether there was any relevance to the fact it was an election they were not.
Oh sure maker was on the call today did not listen to a replay that you've already voted either in person or corruption t. as I did a couple of weeks ago.
I'll remind you that our comments will include forward looking statements.
But I can assure you that none of the forward looking statements will try to project the results of the presidential election to light.
Our forward looking statements will consist of our best guess what will be happening with other companies.
Nope overtaken or required for our predictions or speculation just note that we do list of factors that might cause actual results to differ from our I call. It matches speculation in our ladies specialty sheet College and included the latest call. This morning.
The last two calls we discussed how the current pandemic economic disruption effect.
Our business and I also said that we I take all hope that measures that suggestions put in place would be bringing that back down but at this point, but it does it.
Here go back up but.
Colby we're continuously concerned.
That.
What might happen with our our employees are family and.
It's it's very important to us to.
Keep up with what's going on with our families at.
So I want you to know that we are taking the time and we are setting policies that impact our family.
And our family all of our Corecard employees and their families.
Our intelligence systems and core card Atlanta office, similar blush already in every day for the normal routine and others are in the office on Tuesdays and Thursdays, we work from home and the other days.
We have a mask optional policy the officers.
No mandate, but encourage common sense respect and courtesy in interactions.
Not having the.
Former ability to encourage interactions does slow things down in the office, though in my opinion.
Turning to results for the third quarter I assume you have all read the press release posted this morning.
Results were a little better than expected the as I said for the quarter due to the license revenue that I had initially expected to come into the fourth quarter.
It's always difficult to Ashburn dictate exactly would watch revenue comes in since it's based on hitting two years as opposed to scale again.
I expect the numbers to pretty much to align with what we've been saying when you bring the whole second half of the year together and what's the second at the years concluded.
I'll turn it over to Matt wider CFO now to go through the numbers and give us your thoughts Matt.
Good morning, everyone.
Alan noted, we slightly outperformed our third quarter expectations, specifically with the license revenue.
We think this demonstrates the strength of our business model and our strong financial position amidst a challenging environment.
Revenue for the third quarter of 2020 was $10.304 million compared to revenue for the third quarter of 2019.
$9.522 million, an increase of 8%.
The components of our revenue for the third quarter consisted of license revenue of $1.600 million professional services revenue of $5.392 million processing and maintenance revenue of $2.950 million and third party revenue of $362000.
Similar to Q2, our processing revenue been it benefited from a new onetime program offering by a large customer, but not our largest related to government stimulus efforts. We do not expect the revenue from this program to be a strong going forward beginning in the fourth quarter addition.
Additionally.
You're not spec expect any additional revenue from our former customer wildcard in 2020 and have only recognized to date amounts that have been paid or our probable being paid.
We don't expect to be able to fully replace these impacts for the fourth quarter.
Turning to some additional highlights on our income statement for the third quarter of 2020 income from operations was $3.481 million for the third quarter of 2020 compared to income from operations of $4.200 million for the same time last year, resulting in an operating margin of 34% compared to an eye.
Operating margin of 44% for the same time last year Europe.
The year over year difference in operating margin was primarily driven by revenue mix. In addition to previously announced infrastructure investments in our processing environment as part, which is part of our long term growth strategy.
The investments, we've made and will enable us to take on additional processing customers in 2021 and beyond leading to sustainable growth.
Our third quarter 2020 tax rate was 18.9% compared to 26.3% in 2019.
And this difference is primarily due to the timing of research and development credits, we expect an ongoing tax rate.
Between 22 and 24%.
Earnings per diluted share for the quarter was 31 cents compared to 34 cents for Q3 2019.
And now I'd like to provide a quick update on our liquidity position.
Cash balance at September Thirtyth, 2020 was $34.391 million compared to $26.415 million at December 31st first 2019, a significant increase in 2020 for the nine months ended September Thirtyth 2020.
Cash provided by operations was $15.184 million compared to cash provided by operations of $7.679 million for.
For the comparable prior year period.
This provides us with significant reserves to both weather the current crisis and invest in our future.
Our strong cash position allowed us to invest $6.2 million in our processing infrastructure in 2020.
And opened a new recently announced offices in Dubai and should not.
We believe these new locations and people will allow us to enter new markets and further expand our offerings on the core car platform.
The impact of the COVID-19 related and economic slowdown continued to be muted for the third quarter of 2020.
We have mitigated revenue declines through our ability to quickly modifier platform, enabling a large customer to continue participating and originating loans for the paycheck protection program. While these programs are limited in duration. They highlight our nimble business model and our ability to quickly adapt to client needs addition.
Additionally, our employees in India had been required to work remotely and spit in March. However, we're encouraged that to date, we have been able to maintain key functions and business continuity. In addition to delivering excellent service to our customers as reflected in our strong professional services revenue for the quarter.
Longer term, we believe the investments we've made this year will yield new customer opportunities and future revenue growth.
And with that I'll turn it back to Leland.
Hi, Thanks, Matt.
I think the third quarter is probably pretty well understood by a bus or someone to take the rest of the time too.
Address three areas first.
The wild card business was to reach a press release announcing the opening of the Dubai offices to pandemic affection for our business and then third and finally the important ingredients. We have in place for continued steady long term growth.
Before I do that I'll remind you that you give tax questions to us. While this line is opened two facts and until shows dot com dishes monitor and we may not respond to every question, but you can always check with us individually if need more interim information and if it's the kind of we can provide.
So I was forced to work hard situation.
We are opening a new office in Dubai.
<unk> for a good number of years, we've operated what is known as a pack the Asia Pacific region of the world through.
Through our issuing lessening the wildcard.
Wildcard head and still has offices and employees in Dubai, Singapore and should not India. In addition to their headquarters in Germany.
You are probably all well aware of the wildcard collapse.
Just a few years ago, they were our second largest revenue customer right.
Revenue from them. This year is less than 4% for the first nine months.
There are problems were almost exclusively in their acquiring businesses not in the issuing business, which is what we do.
Since filing for bankruptcy.
They've been selling all that are acquiring but we'll actually have been showing up all of their assets.
We have been discussing taking over their issuing business in the APEC area for several much but its a complicated process with all of the biking and regulator licensing required in each country.
While we wanted to get into business, we didnt want to take on a ongoing obligation that was going to take a long time to it.
It being.
Profitable for the company.
The Wild card business also took a big hit as result of the covert pandemic since many of their programs customers use the cards for the multi currency trouble as we all know travel ground to a halt.
[noise] wildcard licensed software from Corecard. It provided a very flexible multicurrency wallet as a prepaid currency and for virtual card transactions.
Is a prepaid product.
We have now opened our office in Dubai and have made all first of many current work hard employees to join us and it continued to offer the services to occur at wild card customers.
We've done this all with the help and assistance of work hard.
We will be buying assets from work hard and using those assets as they are currently used by work hard.
The total purchase price is expected to be around $1 million.
We expect approximately 50 employees to join US initially and will let others as the business evolves.
Today I have no idea how many current customers will immediately move to corecard.
But we know that they that several I will say fairly low revenue customers have committed to the transition as we come up with our own processing environment there.
Since the announcement of the work our bankruptcy many of their customers have made alternative arrangements. We're in dialogue with them and we're ready to continue serving them with a new processing offering in the region.
We're committed and it's important to recognize that it will take it investment both in time and currency to develop this market.
So don't expect any immediate impact and don't expect me to report on the revenues from apex on a month to month or quarter to quarter basis.
From an accounting perspective, it will be an ongoing expense that will not match revenues in the first year. So thank you, but as we do it's the best but.
I would expect it to be.
Cost well, let's say accretive at the normal sense of the word in the next 12 to 18 months, but in the meantime, the is going to impact your margins, but it's going to be I think a nice office and a nice center for us in the APAC region as we grow the business.
Initially, we'll be emphasizing the prepaid product, but eventually we expect to offer our full premium credit processing surfaces in the region.
[noise], so going about their pandemic.
About it.
I guess about the same as reported three months ago in that impacts our employees, which then results in productivity and efficiency cheap penalties and it impacts new customer acquisitions through slowly good conversations.
The impact is not large and does it keep us, we're making progress, but it definitely impacts us.
Like the major impact on employees in our India operations, we have just begun to bring back a few employees to our Buffalo office, while the Mumbai office employees continue to work from home.
The newer employees and we have a different definition of promotion we talked about newer employees. Those are ones, who did not come from the issuing business or have worked with us for less than three years.
The ones that are coming back first of all wish of our long tenured team who can train them. So.
Some of that training is just working side by side to get the experience our customers buy it from Corecard.
You've heard me.
Probably more than watch that we offer a premium product at a premium price.
That means our customers get more in total from Corecard, what they receive from other processors. So they can pay us a little more and still come out ahead.
As is said in other industries, but British settlement hours quality EPS failure, and you get what you pay for our.
Our ability to offer innovative and the laziest types of programs, along with deep experience and settle much regulatory issues compliance reporting and real time accurate delivery of these are a result of the long tenured and experienced corecard team.
That sets us apart.
Every potential customer does not recognize the value of the experience relationship and accuracy core Cook for budge. So.
So we're not a good match for Saab and frankly would suggest they go to as you say Galileo Marketa and a few others that offer prepaid programs. If they are small programs and we should just I go to the former first data teachers platforms. If they have larger programs and don't need an agile environment.
There are a number of high quality programs with experienced teams who understand the value of the Cork at all and understood the value of the Corecard offerings.
That will allow corecard to grow much larger in the next few years.
Just working with these quality companies.
As additional aside you are probably aware that cabbage was one of our early customers.
Cabbage had visionary leaders and Rob Pro and Catherine Petrobras I would not settle for what the market offers they wanted to bill uniqueness in many areas of their businesses and Corecard played an important role in being the system a record.
Keeping up with the complicated and ever evolving futuristic program offerings.
They successfully sold their coverage American express and our contract has been assigned to Amex.
I guess that means we can now can they make so as a customer.
Sure slate.
This illustrates the kind of customer we want to partner with.
I don't know what future business will look like with a batch and the fourth quarter, we will be very light compared to past quarters with cabbage, but we look forward to continuing working with them.
I guess I've already degressive begin talking about the future and that's what happens when you don't use full scripts on these calls, but so let's just go in and look out to the next few months.
[noise] continuously reminding investors that quarter to quarter comparisons don't tell our story as we manage year to year.
A year ago, we said, we expected 2020 to be just a little better than 2019.
I guess, a little better a little worse, but about the same as we're going to use the year to get ready for faster growth.
Obviously, we could not make the progress we wanted hiring and training new employees with the debt make overhang.
And with a wildcard bankruptcy cabbage stop stopping making loans, that's the payroll protection period.
Lot less license revenue this year, and I guess, adding lifting cost for discussions for new programs will probably end up down for the year shaab compared to last year, but just a little as we almost fill all of those holes with other business.
Looking out to 2021.
And assuming pandemic has stabilized and perhaps gets a little better, but I'm not expecting to take big.
I expect 2021 to be a pretty good year for us with most of the pickup coming in the second half.
Am I just guessing no. We're working on programs now that we can't discuss but believe will generate significant revenue in the fourth quarter next year.
As a reminder, a previously said I can only take only one big customer for next year, and we have that big customer for next year.
Maybe that's a good segue to again emphasize how long it takes to to bring or convert programs from another processor.
Contracts are usually five to 10 years.
Large programs they are in the seven to 10 years smaller programs or in the five years.
They usually call for renewal with a six to 12 months notice against the larger programs longer term contracts call for 12 months shorter term call for six months.
If you're thinking about not renewing you usually start a year out in serious discussions.
With others, because you want to have you or do you plan in place at the time, but notice.
If you fail to if you give notice but failed to get Ulta program. They are significant significant higher prices to be paper processing by carrying over so that made you want to be really clear when you get notice that you know what your plan is.
They also means that you actually start to enter discussions even a year before that notice period.
So I'm now, having 10 or discussion or prospects will not go live.
Until three or so years from now they'll.
They'll make a decision to undertake serious discussions in a year, which will leave them two years, one for shares negotiations and welfare notice period and conversion activities.
What about conversions well you don't do them without significant benefits because they have significant risk. So you don't want to change unless you're seeing significant benefits are probably talk a little more about that and the process, perhaps that next call, but I think I just want to let you know.
We have good visibility on a year out from now.
A lot of your view for two years out.
But I can see pretty bright sunshine through both these lenses as for as large potential business next year I could only take one large customer for the next year, we have the resources for more than one maybe two or three in every case, we're only going to accept business that were certain we can deliver for the customer with.
Exceptional service.
We'll choose customers strategically in order to be able to do that and not take business, where we take it's not good for both of us.
So that's sort of my view out for the rest of this year as well as 2021 <unk>.
Hi, Cobb I think I'll stop there and operator.
Sheath or any questions.
At this time.
Everyone.
A question. Please press Star then the number one.
Your first question comes from Mark <unk>.
Well be.
Geez.
Please go ahead.
Yes, good morning, and thanks for taking my question.
If you could talk a little bit about.
Right.
Your thinking is with regard to the size of the addressable market.
Associated with the company's international expansion.
I think in mind as he said that it's going to take some time before.
[noise] effort begins to move the needle in terms of the company's operating performance how should investors think about the size of that opportunity.
I like to say large, but I know, it's not what you're looking for <unk>. We don't we don't really feel the need to quantify in dollars because of the how large it is there's two components. One is prepaid again, that's a large market and the other is a credit.
The current process or who is one of the largest of the area use his vision plus software that software that we.
We developed 30 years ago that we converted it would actually we predecessor company paces that we converted all of two the new Corecard software.
And so.
So there has not been.
Any innovative credit systems.
In that area for some time, we believe there's room for that in some of the larger countries. There and we also believe that there will be a lot of new things happening in places like Saudi Arabia, UAE and other places as they.
In some ways are there ahead of us for prepaid in some ways are behind us in terms of unique credit programs. So mark I'm, sorry, I'm not going to give you a number do you know if I were thrown out a number I'd be saying, it's a big $1 or more it's just a big number but it will be slow I expect more.
Our new things there.
In did.
Did conversions in that area.
Now, let me make one other comment on back to historically.
The processors that area have charged based on transactions as opposed to a cow steel one thing weve done different as Weve, Georgia, we charge based on a couch and will be kind of evolving our model also there because you're going to have to meet the needs of the.
The current customers in that area.
To model for that so there's a lot of work to do it's one of these things where I think people know we're fairly conservative we were not willing to throw a lot of money buying a business out there I know we've talked we work hard for some time, we wanted to wait and see how things settle down we want to see what the prospects were and we also wanted to limit.
What we spent knowing that it's going to take time to build the business. So I think we are but doing it the way we did it we were able to accomplish all of that and bring on some new a well trained employees who have been running our system in the area and.
We we have high hopes for it but I don't see any big numbers for 18 months to two years out.
Okay, that's fair and you.
The company's cash balance continues to grow quarter over quarter. It did again in Threeq you.
If you could talk a little bit about your thinking about the potential.
For using a portion of that cash for M&A or would you like to just stand Pat and continue to accumulate more cash.
Well, we're not trying to accumulate cash, but we're certainly happy that we're making nice profit in cash accumulates.
Which is something a lot of these other guys kit sales if it takes in the business but.
Yeah, we'll use a million of it here, but you know it could have been a situation where we could have used 5 million of it. So we've got the cash to take advantage of opportunity and we're not trying to bank. It we certainly want to find a good use for it but we're just not going to be led down the path of paying too much for thing.
Thanks.
We again, it's the long view, so I wish we could find something that we could put $10 million to $15 million that that would be accretive within the next year, but right now I can't find those.
I'm not going to count on the.
The same kind of.
Multiples everybody has forever, so that part of the game too.
Understood Thanks very much.
Sure.
Operator, do we have any more questions.
There are no further questions at this time.
All right, we want to thank everyone for for being on the call I. Appreciate your interest in the company and as we always say that if we could help you with the pull other discussions that we can do that's not that.
That's that's appropriate we're happy to do that so thank you for being on the call and have a good rest of the day. Thank you everyone.
[noise]. Thank you. This concludes today's conference call discussing.
Thanks Kim.
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