Q2 2021 Intelligent Systems Corp Earnings Call
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Greetings and welcome to the intelligent Systems Corporation Q2, 2021earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
I would now like to turn the conference over to Matt White Chief Financial Officer. Please proceed.
Thank you and good morning, everyone with me on the call today is Leland strange chairman and CEO of intelligent systems, you'll add some additional comments and answer questions at the conclusion of my prepared.
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Before I start I'd like to remind everyone that during the call we will be making certain forward looking statements to help you understand intelligent systems and its business environment.
These statements involve a number of risk factors uncertainties and other factors that could cause actual results to differ materially from our expectations and factors that may affect future operations are included and filings with the SEC and.
<unk>, our 2020 form 10-K, and subsequent filings.
As we noted in our press release, our strong momentum from the first quarter and continued into the second quarter, we were especially pleased with our results given the difficult situation and India regarding COVID-19.
Our professional services revenue remained strong we saw quarter over quarter and year over year growth and processing and maintenance revenue.
And as expected, we recognized license revenue of $2.3 million and the second quarter of 'twenty 'twenty 1.
Total revenue for the second quarter of 2021 was $13.4 million or 66% increase compared to the second quarter of 2020.
The components of our revenue for the second quarter consisted of professional services revenue of $6.1 million processing and maintenance revenue of $4.2 million.
And third party revenue zero point $8 million and as I already highlighted license revenue of $2.3 million.
And as noted in our press release, we continue to expect license revenue and the second half of 'twenty 'twenty..1 however, we do anticipate some license revenue.
To move to early 2020.2 that said we are pleased with our trajectory so far in 2020, 1 and we continue to project, 20% to 25% revenue growth for the year.
Included in our processing and maintenance revenues for Q2, 'twenty 'twenty..1 is approximately $600000 of revenues from the settlement of unrecorded accounts receivable with wildcard.
We executed an asset purchase agreement to buy hardware and customer and tangible assets and the second quarter and settled all outstanding accounts receivable and with our former customer.
And as such we do not expect any future revenue from this customer going forward.
And as previously announced and discussed during our Q1 call. We went live with the all and sorry exchange, a former wildcard customer and the Middle East region.
And began recognizing revenue from this customer and the second quarter.
We are in discussions with other customers and the middle East and other regions. However, it will likely be Q4 or early 2020.2.
While we realize any revenues from these potential customers.
We expect continued growth and our processing and maintenance revenue from a combination of recently added customers, who are now alive pitch and new growth from existing customers and implementations that are currently in progress.
We have signed a number of contracts with new customers. This year.
And these new customers, primarily fall into 3 different categories.
The first category consists of startups and launching new programs.
These companies are well funded with knowledgeable founders, but it will take time for them to build programs that will contribute meaningfully to revenue.
The second category consists of established companies moving into new markets, whether that's a U K company, moving and moving to the U S or a company with a base of prepaid or debit customers that want to move into credit.
These companies have proven products or a significant customer base to market their new product too. So we expect them to contribute to revenue a little sooner than the startups I mentioned above.
And example of this type of customer that we expect to go live soon is a crypto exchange offering rewards.
Cards paid and crypto currencies, which could change this continues to demonstrate our ability to handle any account and currency.
The third general category of customers that are switching processors. These customers can contribute meaningfully to revenue as soon as the conversion is completed.
Previous calls we've discussed the reluctance of potential customers to take on the potential risk of a conversion.
And convincing them to make a change can be difficult, but we believe there are significant benefits to moving to core card, especially for complex programs.
We are currently working on a large conversion for a license customer as previously discussed and we expect to start a smaller conversion later this year.
Okay.
Professional services revenue was strong and the second quarter as expected and we anticipate similar professional services revenue and the third quarter likely and the range of 5.6 to $5.8 million. However, we could be impacted by the COVID-19 pandemic and India.
Turning to some additional highlights on our income statement from the second quarter of 2021.
Income from operations was.
$3.9 million for the second quarter of 2021 compared to income from operations of $2.7 million from the same time last year.
Our operating margin for the second quarter of 2021 was 29% compared to an operating margin of 34% from the same time last year the year over year decline and operating margin was primarily driven by previously announced infrastructure investments and our processing environment.
And our new office openings, both of which are a critical part of our long term growth strategy and.
Actually we're building a new platform that is resulting in higher research and development costs.
Yeah, and which is in the early development stage future stages will result in cap capital expenditures that you expect to start in Q3.
And then we will recognize depreciation and once the platform is live live and in production and the investments we've made will enable us to take on additional processing customers and 2021 and future years.
Our tax rate for the second quarter was 26, 3% compared to 19, 3% and.
And Q2, 2020, we expect our ongoing tax rate to be between 24 and 26%.
Earnings per diluted share for the quarter was 32 cents compared to 24 cents for Q2, 2020.
We also repurchased $5 million of our shares and the second quarter, while maintaining significant cash reserves to continue to invest and our future.
Before I turn the call over to Leland I would like to give a brief update on the effects. We're seeing during COVID-19, primarily in India. Overall, we continue to experience and muted impact on our results so far in 2020, 1 and <unk>.
Situation, and India is trending and a positive direction, but remains fluid.
We offered.
And office vaccines, allowing most of our employees to get vaccinated, some are back and the office and certain locations, but most continue to.
To work from home.
Our employees have gone above and beyond and to be able to maintain key functions and business continuity and in addition to delivering excellent service to our customers as reflected in our strong professional services revenue.
Hiring and training remains difficult. However, we have increased our head count and the second quarter, which has allowed us to continue to adding cash to continue adding new customers and maintain our guidance for the year.
However, a potential increase and the severity of the pandemic and India could impact future operations and results.
Regarding professional services revenue.
That said, we made we remain incredibly optimistic about our long term prospects and believe the investments we made last year and into this year.
We will continue to yield new customer wins and revenue growth and the future as I mentioned previously we expect top line growth of 20 to 25 per cent for 2020, 1 as compared to 2020, which is consistent with our previous guidance.
And with that I'll turn it over to Leland.
Okay. Thank you Matt.
Just a brief perspective, no bad has big bore Humana and Equifax experience and in fact, he came to intelligent system from Equifax.
He is involved and all aspects of the business not just the financial side and we certainly appreciate the perspective that he brings from his larger corporate company history. So thanks, Matt.
I'll, primarily going to talk about some of our interest all the questions we've been given.
I think that covered the business very well.
The big question that he and I are both getting now is generally concerned buy now pay later a.
It's really hot since.
I think it's a square purchased and Australia, and calibrate or $29 billion and I've got a couple of years actually losing money.
I think that's probably 1 of our problems, we're making money. So we don't get the valuation of the companies that are all losing money and you can promise for the future, but that's our that's another just shot Schneider call me and I guess I should say.
The fact is that they'll pay later is absolutely nothing new our predecessor company patients International did what's called by they'll pay later for Neiman Marcus lay back and the early 2 thousands and then core card offered the same thing for finger up and they'll be familiar with finger HUD. They were a catalog retailer.
<unk>, which is simply and install but play and it's actually a very simple and install about play and that typically has no interest in it and no interest.
Connected to it initially.
The merchant.
Gifts some discount to the.
Chauffeur provider in order to get them to take on the receivable.
Our receivable and then if you pay it off and 2 weeks or 4 weeks ago. What are the terms are and there is no interest and they're low charges for most of them and some of them and do have some charges, but if you fail to pay it all you gotta be hit either with interest or with a late fee.
It's really hard I guess, what are the bases are being around the business per well time, obviously and a lot of trends come and go and we've focused at core card over the long term and staying with the trend that's going to maximize profit and show up I look at buy now pay later I can tell you it's going to get a lot of attention from the regulators.
While you try to get a relative to the interest.
Question and a problem with PS the regulators are coming along and saying what about you got have to calculate to see what the APR is what the effective APR is it and then they're going to grab that won't be about.
Then you've got the idea is already technology evolved and there is no technology evolved and and bad. It's just very very simple Oh, What'd, you talked a computer programming and.
Our Masters program at a University and that's the kind of thing that would decide to a student to.
And do a program about it's it's simple install much core car can do it so what's the advantage of why people pay so much for it and they're really paying because it's better to a bunch of merchants and stopped their technology is the fact that they've already got hooked into a lot of merchants and therefore, it will drive a lot of top line volume.
We're kind of a behind the scenes player we're not up front, we're not out recruiting merchants, we shipped per boat by the.
And that the heavy office back office stuff. So we don't we don't do that I believe that you're going to see it go out of favor at some point or are you going to see the competitive situations.
Situations like getting out profitable share.
Profitable questionnaires and stopped problem now so will it ever get profitable they'll try that to regulation and tie tie it to what it actually does not.
And not really concerned about how it impacts our business I'm also not going to do.
Drop in and try to make that a focus of our business, although we could do that.
Hopefully that covers our view a buy now pay later, it's up it's not going to impact what we do we believe.
And just as a side to that you probably do that.
And we wonder about Rogers customers. If you use their credit card and you could also bad things or installment and that trade more complicated situation. If in fact, you did revolving credit tied that to an installment plan and did a P. Do charged interest you would have to show like a bad a P. R in order to decide it.
The regulators, we're happy if it goes that way because I think you all know we constantly say we're best at complex interest complex programs.
I think it covers and Buffalo showed by that and played later, it's just not a factor for us in terms of where we are now.
The next thing just talk about is and if I may let me ask you are.
Our children and margining number increased dramatically this quarter I think what percentage of <unk> 48 per cent increase ourselves and margin increased 48 per share now it's still only about $100000 for the quarter show up smiling as I say that I know theres always been concern and consternation about why don't we have a lot of of salespeople and marketing people because frankly.
Our our largest competitor and and I'll get back to that second you can find them everywhere with big Bush and all of them all of the shows that michelle's people running everywhere. So why do we not do it I think we're still in what I would consider a enviable position.
Resource allocation, where we get to choose which potential customer offers us the most strategic opportunity.
We still don't take all the business that comes with the Doe Award that might want to do business with US. We still are picky about the business, we take and we choose that not based on where we will make the most profit but based on what offers us the best long term strategic opportunity for the company.
I think you'll find our in releases coming up over the next 6 months there'll be some good names that you'll hear we can't talk about them, yet and until they wanted to do their own promotion, but these are strategic opportunities that we feel will build overtime and we are still talking to folks that could be very very large customers out.
And 234 years from now they have the same concerns that.
You would have I would have and that is do you have enough resources to take care of simply come online and we're working very hard.
After the pandemic impacted and India to bring on more folks we were doing some things differently, there to try and break them out and creating them. So we could take it all and the inquiries we show for Doug What we've said every year I guess, we continue to increase both top line and our earnings slide and that requires.
L Board train people and we expect to continue to do that over the next few years, we don't see and you're probably doing that but we still don't have a big sales and marketing program and we'll do that for a while I.
And I guess 1 of the questions that just came in and talked about let me read it here a little better he talked about.
India, a little bit more and talked about the difficulty that people are having hiring and India people were sub companies and get away motorcycles are offering trips, they're doing all sorts of things and it is absolutely true that technology is at and at very high demand technology professionals are very high demand and India.
It is absolutely a challenge our people or heavily recruited others because they know we have a really good trading and program and we could teach people.
Credit so it's a battle I won't say, it's easy and.
And a PA patek, who runs that operation is absolutely terrific.
Over there and and Roger really good operation, but man it is challenging.
I'm Gonna say, Oh, and I guess I'll leave it is challenging it's not like we can make progress because we are making progress we have over 600 employees. There now I expect to have 700 employees there probably by the end of first quarter of next year. We're also looking at establish another operation and Latin America.
Give us a little more.
I, just simply another way too to add resources and it also gives us and diversification and location.
So I guess, all and all I would just say, we're very pleased with where we're going.
Pleased with where we bid and you can see we're planning for the future to continue the same kind of growth.
Or anything I left out and I'll turn it back to you know I don't think so I think we can go to the to the phone and see if there's any questions there.
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Yeah.
Our first question comes from Anja Soderstrom with Sidoti. Please proceed.
Hi, and thank you for taking my question and congrats on a solid quarter. Despite the challenging environment for you.
And I'm glad to hear.
Fair enough index trading.
And before you can you.
Talk a little bit about that and how.
Wow.
What.
It's better and it did not.
And next 3 months ago.
Well, it's kind of hard to compare you know it certainly is getting better and where we are as I mentioned and in my prepared remarks, we've offered and office vaccines. Our employees. So most of our employees have had been vaccinated summer are coming back into the office suite and we think that's good and.
And like I said trending and the right direction, but it's something that it's just so hard to predict it that.
And to say that it's.
You know, what what percentage better it might be from from Q1 and you know it's it's something that's it's hard to measure better, but there's no way to measure it is clearly better now and.
And where we're hopeful.
And that'll continue getting better despite the.
Delta variances out there what we're seeing.
We take and we're seeing progress we've got more people coming to the office I would say every week, there's a few more people coming and the office. So the trend line is good.
Okay. Thank you it's good to hear that and then also the income from your license revenue that you expect and the second half.
And it's you alluded to before and if you expected and maybe some of that happening and that in the third quarter event, but now you're talking about some of it should go into that.
And they can connect yeah and.
How should we think about that and also the smaller transition you're talking about is that going to help you don't achieve that then.
All of the 20 to 25 per cent growth for this year.
Right, well, so and on the license revenue as you mentioned some of that will likely get pushed into 2020.2 and <unk>.
A significant enough amount for us to change.
Change our guidance and we're making up some of that revenue shift and other places.
Probably mostly a professional services, but also and our processing and maintenance and so the the license revenue we expect to be heavily weighted towards Q4 are you know its always possible they could get and additional tier and Q3, but it's 1 of those things that are you know if you if you've got a.
Certain number of accounts on September 30, and that and it's not quite at the tier I and we don't recognize the revenue and if and you know you're going to get that additional you know a few.
<unk> thousand and the next day, but the way the accounting works and we don't recognize it until we've tier has been achieved.
So that's why and it'll be more heavily weighted towards Q4 and with the potential of some revenue in Q3 as far as the other conversion.
That'll be a processing customer so that won't impact license revenue at all and that probably will be.
2020.2 before we see the impact of that so really unrelated to the guidance we've given for this year.
I think just add to that we would love to be able to tell you more precisely but as we've tried to explain over and over that we have to be somewhat.
We're conservative, but we don't know that we'll get it we think it would be.
Irresponsible.
To try to project it too early we know we're going to get the numbers. We just don't know what quarter, we're going to get them. So.
We do know it good we constantly have some update we do know that we're gonna be pushing some things and in the next year that we thought how.
I must say 3 or 4 months ago that we would get this year, that's just business as usual.
And that's why we try to be very careful and like and we only published what we think we really know and we'd tell you what we think but we say it so thinking game not an absolute game. The good part is all the revenue that we projected.
3 months ago, 4 months ago, 6 months ago, 12 months ago, we're going to get it.
All the lights should and the processing revenue is just what quarter, we really can't be more precise because it's not in our hands and.
Many of these decisions in the hands of other people to decide what and when they wanted to do it.
Okay. Thank you I appreciate it that transparency and myself from me.
Alright.
Our next question comes from Mark Palmer with B T. I T. Please proceed.
Yes. Thank you.
Very solid performance and.
And thanks for taking my question.
And as you're thinking about managing your capacity and adding to that capacity over time as you discussed.
How should we think about how that capacity is going to be allocated.
2.
Licensed customers or your largest customer is your largest customer adds are.
Additional clients.
Versus continuing to build your processing business.
You mentioned that there I.
And I guess, the big names that are coming down the Pike and.
A few months that will be hearing about or are those all processing.
Clients or do some of those fall under the gun.
I Love your largest client or are in the license and bucket in that regard.
Thank you for the question Mark.
Yeah, I think we.
We've said in the past where focus they go and processing. So most of the new revenue will come from processing plant and so we do we do think low because he knew is built with a larger orders and client, but we're focusing on continuing to build the other side of the business and you'll notice we've had really really good growth of that shot.
We expect that to continue to show the resources that we are trying.
Trying to get hired and trained or 4 primarily to grow the processing business and take hold and Newpage there.
Okay very good thanks very much.
Thank you.
Ladies and gentlemen at this time I would like to turn the call back over to management for closing comments.
Okay back and did we miss anything or anything you'd like to add to it no I think we've covered everything thanks, everyone for joining today and as always if you have other questions. Please reach out to us.
Thank you.
Thank you. This does conclude today's teleconference. You may disconnect. Your lines at this time and thank you for your participation and have a great day.