Q3 2021 Intelligent Systems Corp Earnings Call
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Greetings and welcome to intelligent Systems Corporation third quarter 2021 earnings Conference call. At this time, all participants are in listen only mode.
A question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Matt White Chief Financial Officer.
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 remarks.
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 business environment.
These statements involved and involve a number of risk factors uncertainties and other factors that could cause actual results to differ materially from our expectations factors that may affect future operations are included in our filings with the SEC, including our 2020 Form 10-K and subsequent filings.
As we noted in our press release strong momentum from the first half of 2020, one continued into the third quarter.
Our professional services revenue remained solid we saw continued growth in processing and maintenance revenue and we recognized license revenue of $1 8 million in the third quarter of 2021 slightly ahead of expectations.
Total revenue for the third quarter of 2021 was $12 $9 million, a 26% increase compared to the third quarter of 2020.
The components of our revenue for the third quarter consisted of professional services revenue was $6 $9 million.
Processing and maintenance revenue of $3 $5 million.
Third party revenue of zero point $8 million and as I already highlighted license revenue of $1 $8 million.
We're pleased with our trajectory so far in 2021, and we now anticipate 30% to 35% revenue growth for the year.
We expect continued growth in our processing and maintenance revenues from a combination of recently added customers who are now alive continued growth from existing customers and implementations that are currently in progress.
We signed several new customer contracts this year and we recently opened an office in Bogota, Colombia, where we expect a higher operations and development personnel to enable this new and continued growth hiring.
Tiring and training new personnel remains challenging and our new office will provide additional opportunities to hire technical personnel to contribute to servicing existing customers and adding new customers.
We did not initially expect to add customers in the region, but over time this could be a new channel for growth.
Okay.
Professional services revenue continued to be strong in the third quarter and we anticipate similar professional services revenue in the fourth quarter likely in the range of $6 six to $6 $8 million.
Turning to some additional highlights on our income statement for the third quarter of 2021.
Come from operations was $3 $3 million for the third quarter of 2021 compared to income from operations of $3 $5 million for the same time last year.
Our operating margin for the third quarter of 2021 was 26% compared to an operating margin of 34% for the same time last year the.
The year over year decline in our operating margin was primarily driven by previously announced infrastructure investments and our processing environment and our new office openings. Both of which are critical are a critical part of our long term growth strategy.
Additionally, we are building a new platform that is resulting in higher research and development costs.
Capitalized less than $100000.
In the third quarter, and expect higher higher capital capitalized amounts in future quarters.
Depreciation will start once the program. So the platform is live and in production.
The investments we've made will enable us to take on additional processing customers in 2022 in future years.
Q3, 2021 tax rate was 26, 3% compared to 18, 9% in Q3 2020, we expect our ongoing tax rate to be between 24 and 26%.
Earnings per diluted share for the quarter was 29 cents compared to 31 cents for Q3 2020.
We also repurchased $1.5 million of our shares in the third quarter, while maintaining significant cash reserves to continue to invest in our future.
Before I turn the call over to Leland I'd like to give a brief update on the effects of COVID-19 in India. We continued to experience a muted impact on our results in 2021 employees are getting back into the office and we are hiring and training as quickly as resources allow.
We are seeing higher turnover due to increased demand for technical resources.
However, weak and so as a result, we expect personnel cost to increase.
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.
Will yield new customer wins and revenue growth in the future as I mentioned previously we expect top line growth of 30% to 35% for 2021 as compared to 2020.
Which is an increase from our previous guidance of 20% to 25% topline growth.
And with that I'll turn it over to Leland.
Okay. Thanks, Matt you know question, we've already got and then just a few minutes ago has to do with our receivables. So I think I'm going to ask Matt to go ahead and answered that before.
I'll make some comments I think we ended up with receivables are a little higher than normal and I think there's a question as to why I I know our receivables are different than a lot of folks that we've got some really AAA type credit receivables. So maybe you can kind of hold better shneur. Yeah. Some of that is just the timing of revenue recognition we've got.
We had a license revenue that we recognized in the third quarter. So there's there's billings that are not yet due theres. Other increases that are related to receivables that are are now considered paas do however, as Leila mentioned those are from a highly rated large companies with.
Significant our ability to pay so we don't have any concerns about the realize ability of any of our receivables.
And actually there is some benefit to us in the short term.
In terms of being able to realize a little bit.
On the on those balances.
Given the timing of when those are paid yeah, we're not getting into the details of our contracts, but we did pick up a few basis points. When we have higher receivable show given the use of cash I'm perfectly happy with those things grow.
But I don't expect them continue to grow and there's no dispute should no questions about them, but that's a that's a quick answer so.
But I can provide you a bunch of a pretty good picture of where we are in and kind of what we expected near term.
I wanted to say, we have always and will continue to be cautious in providing close guy. That's for reasons that we've explained many times, though let me just try to summarize again our first.
Our ongoing professional services revenue is consistent with what I call repeating even though we cannot categorized it, especially if somebody that's recurring.
We generally don't have professional services contracts that have specific mostly or quarterly or annual revenue.
Tad too, though our contracts are shuffling a road to provide the services that are needed by our partners as they are needed.
Core card can predict based on partner conversations what will be needed by predictions, obviously have a variability patch, where maybe there's a bunch of 10% and in any quarter.
But over a long period, we've been able to estimate what those needs will be and continue to believe this will steadily steadily grow each year with of course, some quarter to quarter viability, hence, perhaps not recurring but.
Predictably repeating.
I'll also repeat most of these services are delivered by high level experienced fintech and Polish or not too typical or not D. P. O typical outsourcing. So hence we have good margins I know I've I've had to talk about this for the past three years I continue to think of it as recurring but really it is repeating.
And in my book is very similar to recurring because we pretty much know, we're going to keep getting them as long as our customers stay in business, they're going to need those have moved people getting them. The second thing is that.
It makes it hard to predict because the license revenue.
Now, usually we can get it right and particularly year, but it's not always an and it's not in our control six months ago. For example, we expect it to have a pretty significant bump in the second half of the year and I stated that three months ago. We ended up getting some of that early and now we believe we'll get some of it this quarter, but the larger babble of your push into next year.
Year, and there's not a certainty that would get it EBIT this quarter, although I believe it will you'll recall that we recognized fashion revenue would need their projects go live animal when shorten numbers of a couch alive that means on December 31st we may be workout away from realizing a million or 2%.
Three in revenue and on January 1st Israel.
[laughter] realizable of course, if that happens we don't invoice, we don't actually recognize it until they know that month, but again license revenue makes it pretty difficult to get precise although we can give a broad view of what it would be and we have a broad view of what will be getting in I wouldn't say EBIT next year at this point in time.
The third thing is new business kickoff timings are really hard to precisely per day, we have a very good well known fintech customer that especially to go live this summer.
Then do you have a change in their offering got pushed in September and now do you do some regulator questions about their innovative offerings and also some bank foot dragging its pushed them next month.
None of this has to do with core car, we could get a new program up and out in less than 90 days, maybe even 60, but it very seldom happens either third party. So basically those are the three reasons and sharply while we don't like to provide quarterly guidance, even though we would very much like to be able to.
Madness, given a range for the year of 30, a certain type of share in that wide range.
Range that Rooney, a volatile fourth quarter and that resulted in what I just summarized.
My thoughts on where we are as a business in the future.
Several years ago, I said I expect just to grow at a 25% over the next five years, we continue to succeed in doing just that.
Said that growing too fast we would put our partner customers in jeopardy, and would not do that.
Still subscribe to that so that is the answer to those that want us to grow at a 15% clip sure. We may grow a little faster as we're doing this year, but we're still saying that the 20% is a good target for us.
I'll say, Matt mentioned, the New center, we have opened in Bogota, Colombia.
Today, I would say my personal biggest challenge is tiny and keeping the talented team we need to grow.
We're adding staff everywhere and continue to look for new ways to pay in sharp people that we can train to be valuable for fintech companies.
People respect for the quality of our help and that frankly is the biggest challenge we have right now we we will not grow.
Any faster than that in 'twenty, and 'twenty 'twenty 'twenty type of <expletive>, unless we get more help it's potentially would grow faster if we had enough, but that's not going to happen in the next few months.
I will say that the business is better for us even though we still have low sales staff there.
There are a sufficient number of companies looking to align with a pinch a processing company that product prioritizes Chabot Ot over topline hyper growth.
And that will allow us to become a very very big player in this business.
We really don't need to tell the names of every new customer to get more customers, we don't need to give huge discounts or by business because what we offer is how about your program.
We don't know the easy payments business that pays pennies per transaction and by the way that's a decent business.
But it's very competitive and often really just don't have the stickiness that complex revolving credit providers.
Nor does it provide the kind of profits our programs, we're able to generate for our customers. In fact that type of drenched you should think of a debit card or a debit transaction or some of the short value transaction. That's supposed to also the cost to the company offering them service rather than a way to make money.
Most of our customers look to us to provide software that allows them to make money not just offer a service for as a convenience to their customers.
I think you need to keep in mind that our bread and butter so to speak is revolving credit products.
Some of our larger customers have customer accounts, where there's many as a dozen different plants and by the way we call plans.
Specific set of terms. So one account you may have one plan. That's 12 months no interest another 24 months no interest.
Another might be 12 months for 6% interest another might be revolving at 12% interest.
Another could be four equal payments two weeks apart with no interest and that sounds like a buy now pay later plan that you hear so much about yeah. It's what it is and what do you get the idea. So if you've got one account with a dozen complex plans that gets hard all of these plants have to take a pay but.
Or pay much in the software has to determine where to apply the payback dollars based on a predetermined algorithm.
Of course, the customer is is involved in that algorithm and he's got it about maximizing revenue, while still maintaining compliance with all the regulations.
And finally, a statement has to be generated that's also compliant that shows the actual a P. R. The annual percentage rate for each plan on a single statement.
No one of the newer entrants into the processing space can do that.
I guess I'd better say to my knowledge all are out here from the lawyers with the college over but you feel free to do the due diligence on your in the asset and your guys. What they can do what I just described above or if they have any customers that do that.
We think this is the future that's our business and while we do all the easier stuff that everyone else does we really believe the complex stuff is where the future is of course, we do concerts or by the competitive landscape to determine if we need to change course.
And make adjustments to our strategy, but our view today is the key is to continue to invest to be able to do the hardest complex fintech task that will be required in the future.
That's why I'm pretty confident that our future continues to be bright and we're happy to have shareholders that walk that steady long term relative value.
I guess with that Oh, well open it up to a super you have any questions. There's not a whole lot of new things to talk about we just keep a running down the same track are obviously doing a little better with revenues and profits and steady growth, but it is the same track.
So operator, if you bought ramp you open it up for questions, we'll be happy to take a few.
Yes. Thank you.
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One moment please poll for questions.
Our first question is from Mark Palmer with Etiology. Please proceed.
Yes good.
Good morning, and thanks for taking my questions and.
Nice quarter, certainly just wanted to.
Hello, Vincent to the extent that you can not not the names of the new clients that you have been signing.
Signing and going through implementation with but what those are and businesses are what verticals you're focused in you know you just made allusion to buy.
Now pay later.
You know what other verticals are you seeing that are bubbling up.
With the type of needs regarding complex revolving credit that you can address.
Yeah, it's the age old question not none of these are really large and beginning.
In fact, I can't fall by one of our others that we said without large.
A quarter or two ago, a met you'll have to help me, but we have a crypto.
Client that just got now flipped over 300000.
A lot of a lot of it got a lot of accounts.
That you know we would've guessed would have 25000 accounts now and they were up in the hundreds of thousands but we just don't name. These kind of gas. So there's there's a crypto and then the the one I mentioned I really don't want to describe it should really anybody program and at my I suspect that we're happy to work with the regulator on weather.
Two innovative and that often happens so we're dealing with we're dealing primarily with.
Right now were dealing primarily with I'm going to call them you guys in Fintech Neil.
And you know crypto is all news so so several new crypto.
Crypto guys were dealing with.
Some neil banks that want to offer some creative things.
And you know, we've always and will continue to have conversations with some very large customers, but that's over the long term.
But those are primarily revolving credit programs are so so really in that same yeah, they're all revolving credit some of them very clean if summer Shanghai, I mean, crypto and it's just a currency you saw particularly creative but it does do it with crypto, which is a difference.
Sorry, I can't be more detailed than that but.
They're all over the place.
No I understand but thank you for that color.
If I could also delavan.
Delved into the the cons.
Constitution pipeline in another way.
In other words can you talk about the extent to which.
The new clients that you're pursuing.
Would be for your own processing business of.
Versus.
Additional license clients that would be coming onto the platform sure.
And is it really is a function of startup furnished model will always be for our own processing platform.
We have a group that's dedicated to that the very large customers are locked into the lightning.
<unk>, that's more are still out in the future when they could come on board. So we're doing both sides, but let's don't list.
I don't want to dismiss the fact that our largest customer continues to also.
Grow and break down new Hot so that's part of our program, but also to be able to break for them to continue to bring on large parts, which they do and even though there's five thing. It's it's it's it's the same to US awesome. Yeah. It's the same kind of growth I think I've said it before I wouldn't continue to grow.
Our processing, but I also want to continue to grow our largest will actually take the voyage.
So I'll be happy if three years from now there's still 60, 70% of our revenue after we've grown maybe 50% or 100%, so where we're growing our all in all areas.
Very good thank you very much.
Okay. Thanks Mark.
Our next question is from Anja Soderstrom with Sidoti. Please proceed.
Hi, Leland and Matt. Thank you for taking my questions that you had a good overview already but if you can just talk about that I'm, just curious about that customer engagement, especially the larger ones that.
How that's progressing and is there anything that's changing there.
Well, just just by definition large being slow doesn't it.
It's it's is progressing but it's it's going to be it's just going to be slow.
And so things like yeah more rely on what we say in terms of the the the <unk>.
ROE path that we're predicting.
As opposed to specific customers is it'll be made up of a combination of things in there they'll probably be a blip, but I'm not going to have a new real large customer.
Provide any big revenue next year, not a new one I think we're again, we're going to grow very well, but there won't be one single new large customer provide a blip in revenues I qualified my words carefully there could be a single large customer that we are doing a little bit for to get ready for the next year I'm not sure.
It will happen next year it could be that you're after but they will definitely not be.
A big new customer generating big New revenues next year. It will be continue on the same track world now to generate that 25, 30% growth.
Okay. Thank you and then also I'm just curious what what attracted you to Colombia.
You know there are there are a lot of choices and we knew we would need new shopping in that time zone Latin American time zones. So we just reviewed.
Potential choices and.
You'll pick one.
Yeah, you'd never know whether I mean, we looked in Costa Rica, we looked at Panama, Colombia, and just decided to the combination of factors, we talked through I believe would be best for us.
We're still looking for other locations to whether it's going to be.
A little further west Philippines, or whether it would be something else at Latin America. We've just kind of have to grow our staff a lot because we got a lot I don't want to use the word pipeline, we have a lot of potential, but we need more people for.
Okay, and what are you doing to attract and retain talent.
Well number one as you you pay more.
As Matt indicated our India is has a tremendous challenge I I'll give you a funny example stopped funny, but it is that we had we had an important point that left us for a 50% pay raise now they have to give you a 30 to 90 days notice before they leave.
But in India, so while he well he was I.
Supposedly supposed to show up at the other report.
Paul you're in another town is it 50% pay raise he continued to negotiate and he had another company that gave me 50% on top of that 50%. So he just able to skip the personal but I used it to leverage. The next one is brutal out there in terms of recruiting and and holding talent.
Well that was known for me. Thank you.
Okay. Thank you.
Yeah.
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Ladies and gentlemen, there are no further questions at this time I would like to turn the call back to Leland strange for any closing remarks.
Alright, well I, just thank everybody for being on and as usual, we say do you have any other questions later you'd like to talk about now about where it shortly but happy to make ourselves available, but where we're very pleased with where we are and we're very pleased with where we're headed we hope everybody has a good holiday since we won't be talking to you for another quarter. So thank you.
Very much.
Okay.
This concludes today's conference you may disconnect. Your lines at this time. Thank you very much for your participation.
Yeah.