Q4 2020 Intelligent Systems Corp Earnings Call
Greetings and welcome to the intelligent Systems Corporation fourth quarter 2020 earnings Conference call. At this time, all participants to her in a listen only mode. A brief question and answer session will follow the formal presentation.
Anyone should require operator assistance during the call free Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now.
Now my pleasure to introduce your host Leland Strange President and CEO of intelligent systems Corporation. Thank you for Leland you maybe.
Good morning, everyone welcome to our call.
I need to remind you in the beginning that whatever about non say during this call was it was a forward looking statement within the meaning other federal securities laws unless of course, we're stating a historical fact.
We will be offering opinions comments on analysis that we believe at this time, given what we know or believe today.
Yeah.
So that's the that's the I'm trying to I'm trying to make the.
The thing that's normally just red tape interesting.
I scratched my head with that so no that whatever we say they're subject to a certain number of risk and we include many of those but not all of them in our FCC filings. If you have any questions where you review the followings on I hope the lawyer is okay with what I, just said now to get to the.
Business or whatever on what is known for I'm going to turn the call over to Matt White, our CFO for a discussion on last year as well as some current expectations, Matt Thanks, Leland and good morning, everyone.
As we noted in our press releases, our fourth quarter results were in line with our expectations, while we anticipated 2020 to be a building period relative to a very strong 2019, we did not anticipate the impact that COVID-19 could have on our planned work force expansion and development efforts. We are very pleased with what we accomplish.
In 2020, and despite unforeseen headwinds, we completed crucial investments on our infrastructure that laid the foundation for 'twenty 'twenty, one and beyond.
Revenue for the fourth quarter of 2020 was $9 million $623000 seven per cent decrease relative to the fourth quarter of 2019.
However revenue for the fiscal year 'twenty 'twenty came in at $35 million $873000, an increase of five per cent relative to fiscal 2019.
The components of our revenue for the fourth quarter consisted of license revenue of $2 million professional services revenue of $4.783 million.
Processing and maintenance revenue of 2 million for $412000 in third party revenues of $428000.
As we previously disclosed we recognized $2 million of license revenue in the fourth quarter, which was sooner than we initially expected. However, as a reminder, because we recognize license revenue in the fourth quarter, we do not expect to recognize license revenue in the first quarter of 2021.
And I'll talk a little bit more about the license revenue later.
As we indicated during our call last quarter, we saw the impact of revenue declines from wildcard and the government's stimulus program that did not occur in the fourth quarter.
We do not expect any additional revenue from wildcard going forward and have only recognized to date amounts that had been paid or are probable of being paid.
While we do expect additional revenue in the first quarter of 'twenty 'twenty, one from new government stimulus programs. It is too early to quantify the impact of these programs will have on subsequent quarters for the upcoming year.
Similarly, we have started processing loans for American Express.
But it is still too early for us to determine the degree that this customer will impact 2021 revenues.
We do expect continued growth in our processing and maintenance revenues from a combination of new recently signed customers and continued growth from existing customers.
And now turning to license revenue as previously mentioned and also disclosed in our January press release, while we do not expect license revenue in the first quarter of 'twenty 'twenty. One we currently expect our new licensed here in the second quarter and we continue to expect significant license revenue on a second half of 'twenty 'twenty one.
Yeah.
Professional services revenue did see a dip in the fourth quarter, primarily due to recognition for the recognition timing of various projects. We're working on in the first quarter of 2021, we expect similar or slightly higher professional services revenue as compared to the first quarter of 2021 professionals.
Services revenues for $5 $3 million.
Yeah.
Turning to some additional highlights on our income statement for the fourth quarter of 2020 income from operations was $2.732 million for the fourth quarter 2020, compared to income from operations of $3.979 million for the same time last year.
Our operating margin for the fourth quarter of 2020 was 28 per cent compared to an operating margin of 39 per cent for the same time last year.
Year over year change in operating margin was primarily driven by lower revenue and previously announced infrastructure investments in our processing environment as part of our long term growth strategy.
The investments we've made will enable us to take on additional processing customers in 'twenty and 'twenty one in future years.
Our fiscal 'twenty 'twenty tax rate was 23, 2% compared to 18, 8% in fiscal 2019.
19 tax rate benefited from tax deductions on stock option exercises, which have been depending on the timing of the option exercise and the difference between the grant date and exercise date fair value.
We expect our ongoing tax rate to be between 22 and 24 per cent.
Earnings per diluted share for the quarter was 24 cents compared to 41 cents for Q4 2019.
And full year 2020 diluted EPS was <unk> 91 cents compared to $1 22 for the full year 2019.
I'd now like to provide a quick update on our liquidity position our cash balance at December 31, 2020 was $37.956 million, a significant increase compared to 26.415 million.
As of December 31st 2019.
As we noted in our press release, we repurchased one $6 million of our shares while maintaining significant reserves to weather the current crisis and invest in our future.
Also invested $6 $9 million on our processing infrastructure in 2020, and I'll put the recently announced offices in Dubai and Shanghai.
We believe these newly added employees in locations will allow us to enter new markets grow our processing capabilities and further expand our offerings on the core car platform.
We are still on the early stages with these new offices. However, we expect to start generating some revenue in the second quarter.
Before I turn the call back over to Leland I would like to give a brief update on the effects we're seeing during.
Continuing pandemic overall, we experienced a relatively muted impact on our business stemming from COVID-19 related economic slowdown and in 2020.
The most significant impact has been on our employees in India that have been working remotely for almost a year now we're encouraged that we've 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.
However, we haven't been able to hire and train at the pace for your expected before the pandemic, which could impact growth in our 'twenty 'twenty one on professional services revenue.
We remain incredibly optimistic about our long term prospects and believe the investments. We've made this year will yield new customer wins and revenue growth in the future as mentioned in this morning's press release, we expect topline growth of 15% to 25 per cent for 'twenty and 'twenty one.
Compared to 2020.
And with that I'll turn it back to Leland.
Okay. Thanks, Matt.
I'm going to make some short comments and then open it up for questions, which you can do on the phone, but another way you can do it it's just send us an email questions at Intel ships Dot com.
I have my computer opened in upstream.
They come in and we're not gonna be able to answer all of them, but will it goes until about 11 30.
Yeah.
I always take a look at what I've said in the past before having these annual call for two reasons I don't want to be repetitive I want to check on my shelf for accuracy. After the fact.
It appears that.
The last three years.
I said something to the effect that we did not believe the year would be as strong as it turned out to be.
I've said that at the end of 18 19 and 20.
We felt that each year would be good but had no information in January of each year that would justify a for a forecasted range different than what we had articulated.
As I've said before our budget forecast, we're not meant to be either conservative or a stretch just our best guess based on contracted.
And business under discussion.
We recognized an income in it that license revenue is virtually impossible to predict on.
On a quarterly basis, although we can come pretty close at predicting annual amounts.
I emphasize the word flow sheets again, I've said, we don't know how well our current or new customers will grow their portfolios in many cases. They also like good insight on how though growth.
This past year has no real exception as Matt discussed we received license revenue in the fourth quarter debt earlier, even intelligent third quarter, we thought it would not come until the first quarter of the year of this year.
That was good for last year, but eliminates a couple of million day, we expected to come in for this first quarter.
And for the year, we certainly didn't on each bank to project the insolvency of wildcard.
That wanted that put a hold on our projections of almost $3 million. We also did not expect pandemic related events that also cost us I know there are probably a million in revenue.
One of our customers does mobile parking and one of the big areas of income in New York.
And of course business loans dried up so the cabbage revenue went down it was forged business loans now some of that was made up in other ways as Matt talked about.
You've heard me repeat too many times, it resources or a constraint on growth with.
With the lower demand on resources about wild card, we were able to move some resources to other billable work and then total made up the big hole slipped by debt insolvency and a pandemic just still in the euro five per cent.
I'm very happy with that result showed a couple of short with my comments in past years. We certainly ended up about where we thought we would be but we got there in a very different way than we expected certainly the fourth quarter license revenue made it possible.
It calls throughout last year.
Probably unintentionally underplayed the effect of Covid on our operation as our numbers continue to come in strong as Matt said they were the effect of Covid muted in terms of our numbers, but also as he said it certainly impacted our ability to grow 'twenty 'twenty one as much we had previously thought.
Al.
A lot of business went into slow motion.
And making a strategic move to change processors became more risky for potential customers.
We did not get a substantial number of new team members sufficiently trained to handle big new opportunities.
Remember a year ago before the pandemic just said, we reduced 2020 as they catch our breath here and gear up for a big 'twenty 'twenty one.
Well, maybe 'twenty 'twenty turned out to be more of a base hold your breath that a catch your breath.
One hold your Breath example is our growth in India, we set out a plan in early 'twenty 'twenty to buy land and build a catalyst for a thousand employees and they're in our India headquarters office of Bhopal.
But due to COVID-19 those types of activities ground to a halt and we're just now moving back down that path to either buy land and build or buy buildings. The opportunities you have somewhat shifted due to COVID-19.
Also just reiterated what Matt says, we do expect our processing revenue used to continue to grow in 'twenty 'twenty, one as we add do processing customers.
Our current expectations are to grow total revenues in the 15 to 25 per cent range.
With that I am actually going to go now to questions and I've got some already had several of them I'm just going to try to combine two into one.
People were asking about I got three questions about the cloud and about our technology and our new Oh, a new effort to rewrite their software.
Answering that you're trying to put all those together I would say we expect to spend in the neighborhood of 25 million on the next few years with a team taking a fresh look.
That's how to do issuing with all the newest tools available, including the cloud well.
While we believe we have the latest and most flexible and agile architecture in the market place today.
Not wanting to rest on our laurels.
Cloud is mandatory in addition to being a buzzword and we currently run on the cloud as a matter of fact, our new operation in the Middle East headquarters in Dubai is moving for work or Germany computers to the Asia cloud that is the Microsoft cloud other.
The way we also have an instance, running on the AWS cloud So we run on the cloud.
While everyone is chasing it for putting everything on the cloud in my opinion that may not be the best style solution for everyone.
So our new architecture will be cloud independent included running no profit clouds.
That's what our own U S processes system is doing today, it's a private cloud.
We believe we will have a cost advantage with this solution that will play out over the long term, but we do check the mark.
That we run into cloud and I think that was the essence of what other questions do you run their clouds and that's clearly something that all prospects. One other questions I ask that you run on the cloud and we say well does it matter and they they really don't have a good way to answer that other than we just need to know.
All right I've got two more questions that just came in let me.
So it was up here we go.
One is about our American express growth can you elaborate on the loan process that Youre doing for American Express.
The fact is we are processing for American express based on their purchasing of cabbage, they've taken over the cabbage contract. We now have an agreement with American Express and we are running a we're going to be running a completely separate environment for that product I can't say.
For about the product I will tell you are factually, we do not know how fast it will grow we do not know what their plans are you know this is the case with many of our customers a day they get started day.
Based on kind of measure their progress I see what's happening they decided what they wanted to do in many cases are they want to put things on pause for they've changed their program they've learned something so the fact is we are processing for American Express, we just don't know how fast or.
You know how that program will growth, we do think it's significant so that they've made the decision to stay with US. We're also.
Continued their process, what's called the old cabbage as they run out for loans.
We're also continuing to process the old cabbage for the P. P. P loves a good have no idea how many loans will come on that last year. It was significant for us we're hoping it will be similarly shouldn't I forget, but it's very hard for us to try to project that and it's very hard for an analyst to try to factor.
That is the other numbers, but we just want to let you know we tell you what we know, but we can't tell you what we don't know and your guess is as good as ours on how fast either go for who will work.
Another question that came in is Oh, there's a little bit on better breakfast branch. So it looks like everybody loves American Express here.
One is about how do you think about the timing of share repurchases in relation to your underlying business or in relation to the volatility of the stock.
Well I I generally try to make sure that I don't comment on stock price because I really have no idea, where it would be and that for saying that I'm on the comment on stock price.
One comment I will make is that you know given the relative valuations of other fintech companies in the business we were probably.
We're probably on the low end of valuation now on the other side of that given the norms as how you would value the company based on their growth rate and there are profit, we're probably about right.
So I have no idea in terms of other additional share repurchases. When we have that open we've never felt like we should.
Manipulate the price by stepping into the market. So we're simply there if there's a.
If there's a clear yes.
Our balance sheet going for us, meaning without any question into value, we're likely to step in and do it where that number is I can't tell you right now because it probably doesn't move as the market moves.
The other the other question was on our impact on Covid in terms of trends in the underlying in customer sign up for new cards.
I don't see I don't think we see a trend there I think there's a the.
The new card sign on for our current customers is going very well.
Even to the extent when we say.
Well, we we think now we may have another why shouldn't here in the second quarter I think most of you realize how those tiers for what may have barely made it for fourth quarter of last year instead of the first quarter, but we made it weighted on fourth quarter. We think based on current rates that we'll probably have another tier in the second quarter for.
One of our customers and we are pretty certain.
Again based on the information we have now that probably in the third quarter. We're gonna have a very very big accretion on license revenue.
Could some of that moving into the fourth quarter of course, and it's not really something that we can control it has to do with our customers.
Customers or potential customers, either deciding to slow down on what they're doing maybe make some changes to move it into another border or to accelerate a little bit where there. So we could go either way, but it's not within our control on the other hand, we don't we don't see any particular COVID-19.
Impact.
From the.
The business side other than things I've mentioned earlier on things like the parking business. It obviously affects you if you're making loans to.
Small business it definitely impacts you.
Let's say could you expect more could you say more about what you expect for the Dubai Office next year honestly, we think we're gonna grow that we're not a it's not a significant number this year, we hope it'll be significant two years out.
We're just not up but we do expect to get new business, well definitely have newpage and its full processing.
Well take a question from the sure and the phone Leland.
Operator is there anyone waiting to ask a question.
Yes, we have.
Two participants one moment.
Our first question comes from Mark Palmer with BTG. Please proceed with your question.
Hey, good morning, gentlemen.
Morning.
I'm.
Just wanted to get your perspective on the guidance for 'twenty 'twenty. One you know the range you provided.
It's fairly wide 15 per cent to 25 per cent. If he could just give us a little bit of color on.
What would cause a the result could be to the higher end of that range or the lower end.
Yeah.
And you can always take a shot at that one sure yeah. So it's the if some of the unknowns that we talked about if it does come in a more positive than than than maybe we were planning for that some of the upside you know we've talked about a day the new offices in Dubai and some other revenues that we could get there if that comes in quicker than expected.
It will.
It'll be at the higher end and similar for American Express, we're trying to be trying to take a middle of a middle range there.
So if we don't know what the American for this program will brain, we don't know what the PPP loan program or brain, we don't know how much of.
Additional revenue will get in the middle East or what we expect to have some and.
I would say those are the main well theres actually some other unknowns and I'll add some other color here on people you wouldn't know about customers were signing new customers, but they're typically small ones. There's a.
Cash project that we just signed yesterday for a one of the neo banks that has a pretty big name, but would know would know kind of around the world Europe and the U S. But it should test project now it for.
And they're paying us for it.
If it were to work out well they could end up doing a lot of visits this year they could decide after.
Six to eight weeks of test that they want to make some changes so it differs for three or four months as they make changes and they'd look again, so it could go into next year.
Those are unknown Mark it's why we have to try to be careful we believe 25 per share. It is the is the upside cap, we but we are pretty sure. If 15% is the lower side cat. So we're kind of picking that debt wide range because that's all we know now.
Understood. Thank you.
Okay.
Do you have any other questions on the phone before it's with each other.
Yes. Our next question comes from on this so there are strong for Mr. Dougherty. Please proceed with your question.
Hi, Good morning, Leland and Matt. Thank you for taking my question. So I just wanted to get a bit better, but I understanding of out of them.
Headwinds and sorry for the growth you mentioned some of them.
Difficulties hiring in India on that might hamper your growth how would that would you be able to achieve the 25% upside even if youre not able to hire in des Moines, and downright how do you see that affecting your gross targets yes.
Thanks for the question no. We believe that we will have the resources to achieve the 25%. If these programs growth of that degree C. We have we have different kinds of customers some require resources.
For the level of I'm going to say picture per cent of revenue, we need we need resources for that some theres a lot of skill to it would be 20 per cent and cost to for the for 100% revenue. So the kinds of things that we're talking about that hits the upside that's more of the scale side, but we believe that where we were blue.
Well, we're certainly health coverage to be able to go to the 25 per cent, yes. These customers achieve anywhere close to their goals.
We we have to look a lot further out in terms of.
PA training and I'm Gonna give you. Another example here. So we have we have I'm not going to be called moat central cost for we have someone a major bank that we've been working with in terms of showing them, what we do and I'm on the gifts that they've got.
200 man hours are into just looking and demos and that means they may have 25 people on an hour hour and a half demo several times, but yet.
Just the last couple of days I got something more specific from them and they said something about all it's great to learn about your grade Arctic architecture, but I wish one of the top executives and it should.
Reading or credit aspiration for really big but our roadmap is not fast we're approximately three years away from.
For them actually any change if we were to make a change, but we look forward for continuing to learn more about your capabilities.
So hopefully you can you hear me talk about the long term and the long cycle here hopefully that will help you. That's a very specific example, that's happened this week that it's not our first contact with them. This week, we've been having but we're heavy at the highest level of law with.
25 or more people at other levels are so these are strategic.
Strategic decision for these people and and they before they would go with US they would expect that we have a.
Really good praying to group to go with it because the reason I go with US are things like our people. That's one of the main reason second as our architecture and and you know third is our ability to move fast. So we're training, we're hoping to be training this year for 22.
<unk> three.
In terms of the way we look at it Oh. This is a long term vision to compete with the biggest people out there and so hopefully that will give you a little more perspective, because that's a real life example, I've got the email up right now, but I'll just read out to you and we will stay in dialogue and they expect as you said he said I look forward to learning more.
They are going to continue over the next.
A couple of years are to still work with us.
To see what we have compared to other people and then they'll do an RFP at some point.
Do we have any more phone questions.
Yeah.
No. There are no further questions at this time I would like to turn the floor back over to management for any closing comments.
Alright, well. Thank you. We appreciate everyone's interest on Oh for the company and we know there's been a lot of volatility lately have no idea, where that's coming from but hopefully you're satisfied with some of the pricing and again, we're building for the long term. So we're not concerned with where it is now but we believe that what we have in place and we believe that.
Conversations that we have and we believe that are where we're headed we're at a good place again. Thank you all for your time and we look forward for the next call.
Yeah.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.