Q1 2021 Intelligent Systems Corp Earnings Call
[music].
Greetings and welcome to the intelligent Systems Corporation first quarter 2021 earnings Conference call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Anyone should require operator assistance during this conference. Please press star zero on your telephone keypad.
Note. This conference is being recorded.
I will now turn the conference over to our host.
The strange Chairman and CEO. Please go ahead Sir.
Thank you good morning, and thank you everyone for joining us today.
As you probably know this morning, we announced earnings for first quarter, 2020 one of them all of the 10-Q.
I'm going to turn the call over to Matt White intelligent Systems' Chief Financial Officer, just a minute who will discuss the corner. The result is bullish expectations of and some things that are currently impacting our operations of will.
I'll say upfront not much has changed and all of a lot to add except for the COVID-19 impact compared to the last call. So it may be of short call also though I want to remind you that we will take questions. Upon the conclusion of our remarks.
Probably one of the best place to do at the I wish to email us during the conversation any questions you have two questions and Intel shifts dot com.
Matt and I are bolted in the covered from and we are monitoring that that's probably the best way. We may not have answered them all specifically as I do try to weave. The information you may be asking in the context of other comments.
With that I'll turn the call over the map to discuss the first quarter.
Thanks, Leland and good morning, everyone.
Before I, just before I start I'd like to remind everyone that during the call we'll be making certain forward looking statements to help you understand intelligent systems and its the business environment.
Statements involved in the involve a number of risk factors uncertainties and other factors that could cause actual results to differ materially from our expectations factors.
Factors that may affect future operations are included in filings with the SEC, including our 2020 form 10-K and subsequent filings.
As we noted in our press releases, our first quarter results were in line with our expectations.
Our professional services revenue remained strong and we saw quarter over quarter and year over year of growth in processing and maintenance.
Revenue for the first quarter of 2021 was $8 $9 million of 13% increase compared to the FERC first quarter of 2020.
The components of our revenue for the first quarter consisted of professional services revenue of $5 $7 million processing and maintenance revenue of $2.6 million in third party revenue of $558000.
As we expected we did not receive any license revenue in the first quarter. However, as a reminder, we do expect to recognize the license revenue on both the second quarter and second half of 2021.
While we recognize some revenue in the first quarter of 2021 from new government stimulus programs. The impact was minimal and will likely not likely have a material impact on our annual results.
Similarly, we have started processing loans for American express, but minimal revenue was recognized in the first quarter and it's still too early for us to determine the degree of this new customer will impact 2020 one revenues.
We do expect continued growth in our processing and maintenance revenues from a combination of recently added customers, who are now live and continued growth from existing customers.
We went live with the all on sorry exchange in the second quarter of 2021 and exciting beginning for our Dubai office, and our global prepaid processing platform that will drive future growth on our processing revenues starting in the second quarter.
Our platform provides complex functionality of multi currency wallet was 17 different currencies and one wallet.
Turning to license revenue.
We did not receive any license revenue as I mentioned in the first quarter and that was in line with expectations. However, we do expect as true to achieve of new licensed here on the second quarter and we continue to expect significant license revenue in the second half.
Professional services revenue was strong in the first quarter as expected and we anticipate similar professional services revenue in the second quarter likely in the range of $5 five to $5 $7 million. However, we could be impacted by the recent increase in severity of the COVID-19 pandemic in India, which we will discuss more later.
Turning to some additional highlights on our income statement for the first quarter of 2021.
Income from operations was $1.465 million from the first quarter 2021 compared to income from operations of $2.379 million from the same time last year.
Our operating margin for the first quarter of 2021 was 16% compared to an operating margin of 30% for the same time last year.
The year over year decline in operating margin was primarily driven by previously announced infrastructure investments in our processing environment.
Our new office openings.
In Dubai in Chennai, both of which are a critical part of our long term growth strategy.
Additionally, we are building of new platform that is resulting in higher research and development costs.
Uh huh.
Of that development is currently in the early stages and therefore, that's most of the expense future stages will result in capital expenditures and depreciation once the platform is live and in production.
The investments we've made will enable us to take on additional processing customers in 2021 in future years.
Our Q1 2021 tax rate was $26 one per cent compared to 28 five per cent in Q1 'twenty 'twenty.
'twenty 'twenty tax rate was higher due to a valuation of allowance on tax benefits.
From Q1, 2020 investment losses, we expect our ongoing tax rate to be between 23 and 25 per cent.
Earnings per diluted share for the quarter. It was 12 cents compared to <unk> 12.
12 cents for Q1 'twenty 'twenty.
As we noted in our press release, we repurchased $2.7 million of our shares while maintaining significant cash reserves to continue to invest in our future.
In April of 'twenty, 'twenty, one 2021 as announced this morning, the board approved an additional $10 million authorization for future share repurchases.
Before I turn the call back to Leland I'd like to give a brief update on the effects, we're seeing during the COVID-19.
The overall, we experienced a relatively immediate impact on our business.
Stemming from the COVID-19 related economic slowdown in the in the fiscal year 2020, and so far in 2021. The most significant impact has been on our employees in India that had been working remotely from more than a year now our employees have gone above and beyond to be able to maintain key functions and business continuity. In addition to delivering X.
<unk> 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, we expected before the pandemic, which could impact growth in 2021 on professional services revenue.
Additionally, the recent increase in severity of the pandemic in India could impact future operations and professional services revenue.
We appreciate everything our employees there of done and continue to do throughout such a difficult period.
We remain incredibly optimistic about our long term prospects and believe the investments we made last year and into this year will yield new customer wins and revenue growth in the future as mentioned in this morning's press release, we expect top line growth of 20 to 25 per cent for 2020, one as compared to 2020, a tighter and slightly more positive range from our previous Este.
Amount of 15 to 25 per cent.
With that I'll turn it back to Leland.
Okay. Thanks, Matt.
It's kind of ironic that many companies now or.
Our short on the til in of the COVID-19.
The experience that are talking about are coming back and are looking to full reopening and Matt talked about our issues with COVID-19 where are we.
Kind of went through the last year without any great impact on me in terms of our operations and now we're seeing some impact of.
I would say the COVID-19 in in our India operation Today is our main concern.
We're concerned about the employees and their families.
And the daily impact either directly or emotionally even if they wonder if their next we're doing everything we can but so are all the other companies. So competition from private doctors of vaccines is a difficult one at this point.
Think of the latest report we have from our offices in India as of about 10% of our employees are affected.
And there have been some who've had it and who have already recovered.
How does that impact our business well first we obviously have to align our resources to maintain current revenues. That's simply means we're going to first focus on continuing to support our largest customers and by that I mean, the largest in revenue.
Resources are tight then those customers get the priority.
When we spread pure resources across all of our needs future business and smaller customers have to the bad those resources that are left after we've maintained support for the largest customers.
We do believe that we can.
All of that and don't see any deterioration in any of the.
The support and the revenues that come from that from our waters of customers.
Thank you heard Matt say that we expect additional license revenue this quarter.
And all sorts of essential addition, Washington, maybe in the second half of the year.
That's.
All of us actually to happen because of what I'd just share will maintain cost of support for our key customers, who will provide you a company of the revenues.
But again, emphasizing what bad shade with cat just most of the impact of COVID-19 on the earlier plans for getting a work force up and trained to accelerate our growth.
I wish I could quantify the impact of since I cannot projected timeline.
For getting COVID-19 under control of simply cannot at this point doing even better in terms of projections.
We do continue to edge of our team in the U S. But most of that increase in expenses go into what we call. The intestinal project. That's the complete reengineering of our processing software using the latest technologies. It's.
It's a culturally of multiyear project, but we believe it has a big future pay off.
And we'll talk about more.
About that later as it develops but just wanted to make you aware of we are adding a good number of resources there and he's pitch.
As far as new business, you probably read about the opening of our Dubai officers of Matt commented on that we're gonna be adding new customers. There later this year.
We are running of complete separate instance of our software on Asia, which is the Microsoft cloud support to support the multi currency operating there.
Also in the U S. We have several new customers coming on within a day the credit card programs, including one of the crypto rewards. These are not big bikes, they're new programs that will take time to develop.
So that's pretty much the highlights of the business before we get to some of the questions I do on a mentioned however, the lawsuit that was filed.
The.
Ah.
The class satisfaction law suit the other stuff has been dismissed by the judge.
Our waiting on the rest of the opinion, but it has just made us as we've talked about a couple of years ago would've thought it had no substance we had hoped they would shouldn't dismiss it but there's always the question when you get in the quarters as to what will happen, but we're happy to report it was dismissed.
Let me go to some of the questions I think one of the one of the like is has said that one of the core college no significant selling force is its flexibility and credit processing capability. So it's a bit surprising that allied sorry of exchange decided to use of core card for prepaid.
Can you help me understand that dynamic what differential core card on the prepaid side well you know I talk often about the complexity of credit and I do that because that is really one of the things that we do that very few other folks do other than the big processors. There are a lot of prepaid processors out.
Rob I don't know how to quantify that but 50, maybe 100 of the numbers on the board and it's not thousands, but they're all of a lot of a lot more prepaid processors. The credit processors. So we tend to emphasize the credit, but we are of very strong prepaid offering.
We have a good number of customers on our prepaid platform and we have a particularly strong multi currency all free. So that's what would attract folks who are particularly the odd issuing travel prepaid cards, where folks are going to different countries they need a different currency.
Again, I know that of often talk about just credit complex of credit, but the truth is we have the British from prepaid program of all of which are good prepaid customers I pick up one of our customers is providing them.
Maybe I shouldn't shell of the names, but they are providing.
Our prepaid card for one of the large pharmacy benefit of providers.
So we are very active of that we did get.
A question.
Through our questions at the courtyard, Alright, Intel ships Dot com, that's the technical question and since we're in the office of the day of Matt and myself also have done too is our CTO with us I'm on I asked that question I'm going to list the ought to to explain it for those of you that like the technical side, how fun so a doctor.
The question is could you explain the importance of token sensation for your class and usually the all of her about other providers.
So that's it on thank you I'll try it maybe a minute so.
Why poker transaction.
As you all of the the Cogs on getting digitized every day, so the the Cox of everything.
Provision of added to the the wireless mobile mobile wallets.
As the that market segment will increase this.
The usage of.
The the digital side of the Cox will increase so that's why the client of our clients want to add these cards today of wall ex mobile wallets and on.
And ultimately to the.
The the Apple pay and Google pay and the Samsung pay out and the other pace. So that's what that's why we called Cook in his section. So as you can see the what the market share is increasing.
And.
And that's the strong offering would have the kubes uploading coconut is actually one of his Manuel like Yo Yo Kaka the wallet and then your lack of scan and that's the manual side a lot of people do it we do it everybody does it mean in any of any.
The contracts allowed us to kind of it that way, but what we do now on top of that is the automation of part of it which is a and it a sequence of a P is that can be originated from our clients' mobile app that the consumer is of carnival. The alt they happen to US yes, I'm on a coconut my card the push.
The button they don't need to have the card number they don't need to have the actual card with them, but this button.
And these checks the the sequence of automation of course through the mobile app to the clients are the.
That's the the Gateway and then the the client will actually Colorado, we do all of the cryptography before that the current information that's necessary to the token dies and then from there we send the the cryptography of back of the client the client census of the mobile App mobile app sensor to the the wallets like Apple pay of all that one then the Apple pay the talks to the Mastercard or other providers.
On blah blah blah, so there's that whole sequence I don't want to take up too much time, but that's all I'll go back to using the provision of all the other talking about earlier that is definitely whether the other people of doing it yeah. Some cost of some competition competitors are doing it but we are proud of our solution and we are we believe we are the.
The first two of the market could do that automation of other people came to the to the market too, but the Viva first so it has to do but it could talk of your feet and security part of digital cards and obviously the future is in digitalization.
You you will find that more and more cars will come out even without a number on the card.
The board will be in the wallets. So it's part of our wallet all free so thank you don't too.
Operator, I think I'll open it now the soup, we have any colors of wanted to ask why should we have a few others in writing, but the update we've covered most of it.
Thank you.
And ladies and gentlemen at this time, we will conduct our telephone question and answer session. If you would like to ask the question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is of the question. The Q you May press the star key followed by the number two if you would like to remove your question from the queue of participants using speaker.
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Yeah.
Our first question comes from Mark Palmer with the P. I G. Please state your question.
Yes.
Good morning.
Thanks for taking my question I guess.
Question is you you bumped up the lower end of.
Your revenue growth guidance for 2021, I just wanted to get some color on what gave you confidence to do that in terms of your outlook.
Typically the lunch when we get closer to.
Each quarter, we see a.
How how new cards are coming on you know what the growth rate is for our customers. So we're able to project that a little tighter. We also have a little bit of of history in terms of in the history I mean, the previous quarter history in terms of professional services. So between those two things that gives us a little better inch.
Slide.
For the next quarter or two Matt do you have anything add to that no. I think it's just stayed the you know the strength of the first quarter.
<unk> enabled us to bring up the bottom end of the range and the tightened that a little bit.
What lean on saying so.
Okay. Thank you and if you could give some color on.
What you're seeing right now in the processing pipeline.
In particular on them.
Especially as we are seeing the.
The uncertainty associated with COVID-19 received at least.
In the United States are you seeing a pick up in pipeline.
As a result, if you could just give some color on that in general.
And in terms of new prospects, we're seeing it pretty much medium of I think you still see the larger folks are hesitant to think about making moves in making changes. So that's that that's still very early there is no real pipeline to consider there in terms of the newer entrants are it's fairly strong.
They're coming out with something new so they don't have to worry about messing up something that they already have as far as our growth yeah with as COVID-19 is coming to Oh.
Is it slowing down in the U S. At least we're seeing the card growth increase.
So it's a mixed bag right now and it's still early on I must say, it's in between everything to come out with any real good projections of where what we see.
Okay.
Thanks very much.
Thanks Mark.
And just sort of minor task of question. Please press star one on your telephone keypad.
Our next question comes from Anja Soderstrom with Sidoti. Please state your question.
Hi, Thank you for taking my question.
I wanted to bet on ascending of this partnership the al.
On something in and buy where the wildcard is stopped them.
Is that a unique is that it's the more opportunities for partnerships there or is that the widespread already it does kind of partnerships.
We think it's the yeah, there's more opportunities you know there's a lot of it depends on you know the pace of travel globally. So as that picks up more customers will be interested in a similar offering we had some discussions this morning with the potential customer that went on a multi currency offering unrelated to travel.
So we're getting some subtraction, there, but it'll probably take some more time before.
The travel picks up and people are more you know customers are more interested in and that type of offering but I would say that we wouldn't have made the investment that we had not bought the substantial opportunity. There is just one of what happened. This year yeah. It will it will be in future years, but we take care of substantial opportunity in that market.
And that that was given by the playing opening and are.
Right the opening up the debacle of us taking on a couple of the well first I am sorry, what was a former wildcard the customer.
And there are other former Walker of customers that we're talking to at this point again, because travel is muted theres no real hurry on the airport to immediately do something but as travel continues to open up we think we'll get more customers and we will give more general purpose prepaid customers, there and we'll be looking for credit customers.
Overtime in the in the Middle East. So we think it'll be a strong golfing overtime.
Okay. Thank you and then in terms of the professional services.
That's.
And what's going on in <unk> that might be muted in on cordis can you just touched on that a little bit on the.
But yeah.
Yeah, we can't just expand a little bit it's hard to quantify at this point the very fluid situation as Leland mentioned about 10% of our employees are at our or impact our had been impacted are as he said some have recovered. So it's just hard to tell what that what that impact will be given the fluidity of the situation. There you know there's there's some.
Optimism the things are improving but I don't we're not there yet.
To be able to say, what you're going to be on the same of certainty on what the impact will be in the future quarters. Yes. We've we've found that it's not helpful for us even inside to try to project out what we want to do is to mitigate any issues to make sure. We take care of the cash versus and then once we see it the cash.
The kind of the trend on lot of moving the other way they will be able to project, where we're going with it.
Okay, but it might be more impacts from 2022 lots of assets yes.
Maintaining of your guide for this year, Okay. Yeah, Yeah, we believe that we'll be able to get through 2021 with our plant.
But it will well.
I'll start with our plan that's what the the current customer of rehab, but will impact from potential new business, because as I've said before.
Our new business. They ask you what kind of support do you have what can we expect a and in some cases, they want not only numbers but names.
Very specifically of who's going to support us. So at this point, we are not in a good position to offer that so that does have some impact in 'twenty to 'twenty two we hope, it's a minimal where Jim.
Not going to try to talk about it until we do we see daylight with that.
Okay I understand thank you so much that was all from me.
Okay. We have another question that came in on our questions of Intel's Dot system I'm Gonna let met.
Net read it and try to answer that one share I mean, we got a question about the increase in R&D and I talked about that being due to the the technology platform that we're building are in addition to the new people we've hired in India.
Year over year.
And as far as the the the move from expense to capitalization on the new platform. The timing of that is just dependent on on when we hit the development phase.
So we're still on the early stages of of working on that platform and the weird, we'll follow the accounting rules, which were very specific about when you can capitalize on when your expense.
So it'll be later this year that we started to see more capex.
We expect to continue to increase our R&D spending.
And anticipation of future growth you know a lot of the hiring.
Hiring in India will will impact that on the hiring for our platform development will impact that.
So you know, we don't know exactly what the.
On the run rate will be but we think it will continue to increase and be impacted in the short term by.
The the capitalization of some of those costs, but that'll eventually come through as depreciation on future quarters.
And in future years, I should say.
Okay. Thanks, Matt.
The only other question we have outstanding in all of the entry of quick quickly is about our cloud offerings. I think I've said before we are software is currently running in production in both of the AWS, which of the Amazon cloud as well as the Asia cloud, which is Microsoft cloud.
And we also run on our what we will call of private cloud and data center. So we're very flexible in terms of our ability to run software in the <unk>.
Cloud.
That's the last question, we have I think I want just want to thank everybody for that.
Moving onto the call. If you have any other questions as we usually say you'd contact Matt or I directly on what they've done true for answering the technical questions today and with that we'll end the call and thank you everyone for joining us.
Yeah.
Yeah.
Yeah.