Q2 2023 CoreCard Corporation Earnings Call
Greetings welcome to core card second quarter 2023 earnings conference call. At this time, all participants are in a listen only mode.
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. Please note. This conference is being recorded I will now turn the conference over to Matt White CFO . Thank you you may begin.
Thank you and good morning, everyone.
With me on the call today is Leland Strange chairman and CEO of core car Corporation. He will 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 core card 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.
Factors that may affect future operations are included in filings with the SEC, including our 2022 Form 10-K and subsequent filings.
As we noted in our press release, our second quarter results were in line with our expectations. Our professional services revenue remained strong we saw some sequential and year over year growth in processing and maintenance.
And as expected we had license revenue for the quarter at $1 8 million.
Total revenue for the second quarter of 2023 was $15 $7 million, a 3% increase compared to the second quarter of 2022.
The components of our revenue for the second quarter consisted of license revenue of $1.8 million professional services revenue was $7 $4 million.
Processing and maintenance revenue of $5 $7 million, an increase of 26%.
And third party revenue.
It's not zero point $9 billion.
We did experience a decline in third party revenues as our customers utilized fewer ancillary services on a year over year basis.
Customers can perform these services themselves.
Contracts through third parties or we can provide these services through our direct contracts with third parties.
Services include items, such as customer service statement printing car production network fees and compliance costs.
We'd like to reiterate the third party revenues are lower margin compared to our other revenue streams and so there is less of an impact to the bottom line.
As noted in our 8-K filing last week, we signed an amendment with Goldman Sachs debt. Among other things convert managed services revenue, which is a portion of our professional services revenue from a time and materials basis to a fixed monthly fee of $1 million.
We recognize the slightly higher monthly amount from this revenue stream for the first six months of 2023.
While the partial conversion to a recurring revenue structure is beneficial from a visibility perspective. It will result in lowest lower services revenue for the remainder of the year.
As a result, and combined with lower than expected third party revenue, we have adjusted our guidance for the year to approximately 5% for services revenue growth.
Revenue growth, excluding our largest customer was 7% in the second quarter on a year over year basis. The slowdown from the first quarter is primarily due to lower third party revenues as discussed previously.
We continue to onboard new customers, both directly and through various partnerships, we have with program managers.
Including programs with American Express is the network.
As in previous quarters. We currently have multiple implementations in progress with new customers. We expect to go live in the coming months.
Processing and maintenance revenues grew 26% in the second quarter of 2023 compared to the second quarter of 2000.
22 from the released recently added customers mentioned above.
We're in our lives and continued growth from existing customers.
And now turning to license revenue recognized another licensed here in the second quarter 2023, as expected, resulting in $1 $8 million of license revenue for the second quarter, we expect a new license.
Licensed here in the third quarter of 2023.
Professional services revenue remained strong in second quarter, we anticipate professional services revenue in the third quarter in the range of $6 $7 million to $7 million.
And now turning to some additional highlights on our income statement for the second quarter of 2023 income from operations was $2 $7 million for the second quarter of 2023 compared to income from operations of $3 $5 million for the same time last year.
Our operating margin for the second quarter of 2023 was 17% compared to an operating margin of 23% for the same time last year.
The decrease was primarily driven by hiring in India and in our Columbia Office that we opened in October 2021. In addition to continued infrastructure investments in our processing environment.
Our second quarter tax rate.
It was 24, 8% compared to 23, 9% in the second quarter of 2022.
Earnings per diluted share for the quarter was <unk> 22 cents compared to 33.
For Q2 2022.
As noted in our press release this morning for the full year, we expect growth in services revenue of approximately 5% and license revenue to be between 3 million and $7 million, we expect growth from customers, excluding our largest customer which is all services revenue to be approximately 11%.
We expect license revenue in the third quarter. However, it is difficult for us to predict the timing of license revenue for the fourth quarter and beyond for reasons, we've discussed previously.
Within services, we continue to expect strong growth in processing and maintenance as our customers continue to grow and as we continue to onboard new customers.
Professional services revenue.
To be strong in the first and second quarters, and we anticipate professional services revenue in the third quarter of 2023 to be like likely in the range of $6 $7 million to $7 million. The lower professional services revenue reflects the change to our Goldman contracts converting a portion of the revenue to a fixed monthly fee.
With that I'll turn it over to Leland.
Okay takes that Ah I think you've covered all the central financial picks it up.
Got to talk about a few things and unprepared remarks, but just things that people have been asking us let me just first comment on the.
In fact that you talked about India being part of the reason for the difference between last year. This year I can say at this point we have.
Pretty much flat the growth in the India operation based on slower growth here, we have slightly under 1100 employees as of the end of this quarter.
The contractors that we also use for Ted I would say are our full time employee.
Our full time staff is probably about a thousand employees, we probably have about 80 contractors most of which are full time for us not all and then we have maybe 2025 in charge at the present time so.
And.
In reaction to a little bit slower growth, we have taken the step of slowing things down. There now also weak we are continuing to spend money in two areas. One the Tesla project that we call the potential project, which is the <unk>.
<unk> core car software, that's still perhaps two years out hopefully be it'll be less tied to that and we're certainly going to be using some modules that we're developing let's start a less time that that will be probably one of those in this year. Okay to continue to spend in that way, but the big question that I always ask.
Is.
What about Goldman and apples and where do you stand based on what they've been say there is some press recently that talked about go.
<unk> he was telling me to Mercury's Brecht about taking the Apple.
Account.
I think the president of Goldman said it right when he said the G ill and Apple relationship is not unilateral.
I interpret that to mean that.
Goldman can't do whatever they want to with social relationships without getting complete buy in from those two parties.
How much.
Guinea I know nothing is as you would expect Goldman is very quiet in terms of how they deal with these things and the people we deal with not only.
Will they now tell us, but the fact is they know nothing because it's really just it's really handle at the very top so everything I say now is just speculation based on our relationship and the amount of time, we spent with them and also knowing about what we do in our bedroom software.
So here's what I would speculate well let me back out this one.
So that won't have to speculate.
You know we filed an 8-K I guess, a week or so ago that said that Goldman and core card head.
Had an amendment to the agreement shall we extended all of our contracts for two years.
But we'll give you some indication of the relationship we have got part of that.
Boost some of our.
Revenue that we shouldnt have a materials to fixed price and as Bert said, that's probably going to result in a little less income to us overtime, but we felt like that was the right thing to do to have a two year contract that have recurring revenue.
In terms of a two year contract. It's by my opinion, and I think anybody's opinion, they would take more than two years.
From the time, you said, okay, we're going to move this contract somewhere else to the other party off of scorecard, So where I am very very comfortable that we'll be processing. The Apple card two years from now.
Of course, it can be moved and of course, you need to do what you need to do to keep the business, but we're doing it very well, we just had a very successful and have bought in the quarter processing on the Apple card faster than it's ever been processed before so we're very happy with performance and likewise with the contract renewal for two more.
For years, we also.
Feel very comfortable with that one thing to think about in that contract has nothing to do with really Washington sulfur is perpetual license and as long as they add new quarters, they're going to have to pay us.
So it's kind of unlimited in that sense, but in terms of just the normal things. We do for them is now a two year is now two year agreement.
So what does that mean well they moves that move it is possible it.
How you're unlikely, but it's possible and if they do move at what happens in that well, it's possible that a new.
Provider.
We will still work hard to process. The card now that a lot of things you do outside of processing that dish is those areas. These are the areas that Goldman had problems with it that's your customer service that's a dispute.
Chile, basically dealing with the cultural daily with some regulatory issues. It was not a problem with the processing that we were taking care for them. So.
A new nobody had ever done that before by the way. So if you go to someone new such as American Express they do that all the time, they would know how to do that as well as a lot of other people discovered a lot of folks in fact, there are some rumors that apple might choose a <unk>.
Bank debt basically had no need bike and not.
Not put their name in big letters on the card and then Apple would take out some of that third party stuff again, I believe we would be the process of a part of that.
But other people certainly could do the customer shore originated.
Okay.
That's not to say they.
They get better so that's where we stand on that we don't believe there's a risk of that is largely do what we're supposed to do as long as we do a good job for it. We don't believe there is a risk we believe we've priced it right. We believe that we provide very very good service. So we don't see a problem with that.
Well, that's a that's usually what people call about everybody's worried about what the press says and I would say the next thing obviously roads has slowed we are seeing.
The medium sized banks, we don't deal with the big banks right now, but the medium sized banks are really see.
We don't want anything that would get our name in the headlines are we don't want to announce it change or processors, we don't want to do with anything that simply would would be a big deal that would cause people were taking a hard look at us. So a lot of that conversation has really just been put on hold we still have a good number of customers that are teed up.
They could go rather than at any point, but blackwash about them more.
Just kind of put it names on hold as is.
The current financial economic situation shakes out.
David we arguably that's new is that we're developing a commercial part for a midsize bank.
Yes.
So I went out and said things are pretty much on hold but theres, just one situation where were developing to their special well I won't say their specification, but would there hill, we're developing a new commercial partner.
Product that will go live for what we call friends and family in the fourth quarter that shipped a major it'll be intest it'll be used lightly it would be rolled out in first quarter of next year I don't expect huge revenue from that initially we think it's a very important product for us, particularly.
The fact that it's being.
Developed.
And in hand, with the bank as opposed to just.
Someone came out with a product specifications and we believe it does have really good possibilities both for that good midsize bank as well as others in the future. So that's we're doing a lot of new stuff. We've got still have new clients coming in they are just not getting into market as fast as we would hope.
Get to market.
But any other covenants that you hear from phone social the mainland did I hear that I'm going to respond to yet another I think that covers I don't think it's the only thing I would add is that the there were yeah. There were there were three contracts that were extended.
Goldman one two of those were for <unk>.
Statements of work that we have with them and that was a two year extension and then for the maintenance work that we do that with a three year extension.
That's the only thing I would add okay. So, let's let's take it two questions that we have any questions as we as we always say if you don't want to ask a question here on the call. We're always open to.
To explain whatever maybe we had been explained that well.
So operator, which sheets or any question for US great. Thank you. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment.
It may be necessary to pick up your handset before pressing the star keys.
Our first question is from Howard Gosh with B Riley Securities. Please proceed.
Hey, Thanks, guys for all the color. My question is expense growth you've got a good.
Overview of employee count in.
Also like to point out like you had a lot of employee growth in the last two years or so.
Do you think your expense growth here is gonna be leveling out.
And.
And the next you know year to two years.
Yeah, Yeah, I do I think there's going be some inflation impact obviously to pay royalty expenses, but in terms of overall growth, we're not going to need to grow that a lot to take care of a good bit more business.
We're gonna need actually fewer people working at home the the Goldman Apple team, because that's running pretty smoothly. So we think we're in pretty good shape to take up more business without adding a lot. Matt you want to add anything to that no. That's right yeah that there'll be some smaller increases, but overall, we're trying to keep the head count pretty steady and that's.
What we've been doing in India and are kind of only adding where we need to but we added enough people last year to where our focus is on getting those those folks trained so that they can contribute.
Okay, Great if I could ask one follow up you mentioned you know the banks don't want to do anything that gets there the names in the papers and basically it seems to me they want to keep the risk profile is low.
And.
What what should we be looking for the analysts and investors to know when that's little that modest overhang.
Is listing what what we see in the economy, but what we see in the regulatory picture based on your experience what should we be looking for thank you.
Well, that's a good push now I need to think about that a little bit.
It's hmm.
From an overall economic standpoint.
You need to if we did the the overhang that we're getting you with Fitch hitting at the credit of the U S yesterday and with all the I guess, the market's down S&P erosions down almost 2% there should be down close to one 5% today.
You just need to be you don't need to see growth you need to see some stability.
It's both it's both political economic just some stability. So people could just say, let's just get back to business as usual nobody feels like it's business as usual right now.
Yeah.
Yeah.
I would agree with that and there's many many small banks that are selling consumer.
Credit portfolios to non bank financials to improve that ratio.
So what you're saying makes perfect sense to me. Thanks.
Colorado get back into queue. Thanks.
Okay.
As a reminder, the star one on your telephone keypad, if he would like to ask a question. We will just pause for a brief moment to see if there's any final questions.
There are no more questions at this time I would like to turn it back over to management for any closing remarks.
Alright, well, we just thank you for your continued interest and support we're going to continue to push forward, we feel pretty comfortable with where we are we should take removing faster at this point, but we think we're on the right path and we'll continue so thank you and if any other questions along the way. Please give us a call. Thank you very much have a great day bye.
Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Okay.
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Mhm.
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