CoreCard Corporation (NYSE:CCRD) Q3 2023 Earnings Conference Call November 1, 2023 11:00 AM ET Company Participants Matt White - CFO & Company Secretary Leland Strange - Chairman, CEO & President Conference Call Participants Hal Goetsch - B. Riley Securities Avi Fisher - Long Cast Advisers Operator Greetings. Welcome to CoreCard's third-quarter 2023 earnings conference call. [Operator Instructions]. Please note that this conference is being recorded at this time, I'll turn the conference over to Matt White, ...

Part I Financial Information [Item 1 Financial Statements](index=3&type=section&id=Item%201%20Financial%20Statements) The unaudited consolidated financial statements for CoreCard Corporation as of September 30, 2023, include balance sheets, statements of operations, comprehensive income, equity, and cash flows [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) Total assets increased to $66.8 million by September 30, 2023, driven by a rise in cash and cash equivalents, while stockholders' equity grew to $54.3 million Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2023 (unaudited) | Dec 31, 2022 (audited) | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $31,614 | $20,399 | | Accounts receivable, net | $5,875 | $13,220 | | Total current assets | $48,523 | $42,321 | | Total assets | $66,785 | $63,232 | | **Liabilities & Equity** | | | | Total current liabilities | $10,241 | $7,543 | | Total liabilities | $12,510 | $10,469 | | Total stockholders' equity | $54,275 | $52,763 | [Consolidated Statements of Operations](index=4&type=section&id=Consolidated%20Statements%20of%20Operations) The company reported a net loss of $222,000 for Q3 2023, a significant downturn from the prior year, driven by a substantial drop in product revenue Statement of Operations Summary (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | 9 Months 2023 | 9 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Total net revenue | $13,399 | $14,450 | $43,847 | $53,940 | | Income from operations | $413 | $1,703 | $4,916 | $16,921 | | Net (loss) income | $(222) | $1,359 | $2,909 | $12,885 | | Diluted EPS | $(0.03) | $0.16 | $0.34 | $1.49 | [Consolidated Statements of Comprehensive Income (Loss)](index=4&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) Total comprehensive loss for Q3 2023 was $196,000, a sharp reversal from an income of $1.47 million in Q3 2022, reflecting the decline in net income Comprehensive Income (Loss) (in thousands) | Period | 2023 | 2022 | | :--- | :--- | :--- | | **Three Months Ended Sep 30** | | | | Net (loss) income | $(222) | $1,359 | | Total comprehensive (loss) income | $(196) | $1,473 | | **Nine Months Ended Sep 30** | | | | Net income | $2,909 | $12,885 | | Total comprehensive income | $2,913 | $13,243 | [Consolidated Statements of Stockholders' Equity](index=5&type=section&id=Consolidated%20Statements%20of%20Stockholders'%20Equity) Stockholders' equity increased to $54.3 million as of September 30, 2023, primarily due to net income, partially offset by $1.5 million in stock repurchases - The balance of stockholders' equity at September 30, 2023 was **$54.275 million**[9](index=9&type=chunk) - During the nine months ended September 30, 2023, the company repurchased common stock amounting to a total cost of **$1.551 million** (including excise tax)[9](index=9&type=chunk) [Consolidated Statements of Cash Flows](index=6&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash from operating activities increased significantly to $18.3 million for the first nine months of 2023, contributing to a net cash increase of $11.2 million Cash Flow Summary (in thousands) | Activity | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $18,252 | $10,857 | | Net cash used for investing activities | $(5,477) | $(8,355) | | Net cash used for financing activities | $(1,528) | $(5,042) | | **Net increase (decrease) in cash** | **$11,215** | **$(2,176)** | | Cash at end of period | $31,614 | $27,068 | [Notes to Consolidated Financial Statements](index=7&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail a significant revenue concentration from a single customer, a $1 million investment impairment charge, and the adoption of new accounting standards - The company adopted new accounting standards updates (ASU 2016-13 and ASU 2022-02) related to credit losses on January 1, 2023, which did not have a material impact on the consolidated financial statements[13](index=13&type=chunk)[29](index=29&type=chunk) - A single customer, Customer A, accounted for **62% of revenue in Q3 2023** and **68% in the first nine months of 2023**[50](index=50&type=chunk)[81](index=81&type=chunk) - The company recorded a **$1,000,000 impairment charge** in Q3 2023 on an investment in a privately held supply chain financing company, reducing its carrying value to $0[33](index=33&type=chunk) Revenue by Type (in thousands) | Revenue Type | Q3 2023 | Q3 2022 | 9 Months 2023 | 9 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | License | $0 | $0 | $1,794 | $14,283 | | Professional services | $6,432 | $7,776 | $22,127 | $21,943 | | Processing and maintenance | $5,814 | $5,267 | $16,933 | $13,837 | | Third party | $1,153 | $1,407 | $2,993 | $3,877 | | **Total** | **$13,399** | **$14,450** | **$43,847** | **$53,940** | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=14&type=section&id=Item%202%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses a 19% revenue decrease for the nine-month period due to lower license fees, significant customer concentration, and a strong liquidity position [Overview](index=14&type=section&id=Overview) The company's revenue is highly concentrated with its largest customer, Goldman Sachs, and a recent contract amendment is expected to create more recurring revenue - The company's largest customer, Goldman Sachs Group, Inc ("Customer A"), represented **68% of consolidated revenues** in the first nine months of 2023, down from 77% in the same period of 2022[91](index=91&type=chunk) - An Omnibus Amendment with Goldman, effective July 1, 2023, extended the Support Services term through June 30, 2026, and converted certain payment terms from time-and-materials to a fixed monthly fee, creating more predictable, recurring revenue[98](index=98&type=chunk)[126](index=126&type=chunk) [Results of Operations](index=15&type=section&id=Results%20of%20Operations) Total revenue for the first nine months of 2023 decreased by 19% to $43.8 million, driven by a steep decline in high-margin software license revenue - Product revenue (primarily software license fees) for the nine months ended September 30, 2023, was **$1,794,000**, a steep decline from $14,283,000 in the comparable 2022 period, which benefited from a large customer adding a new institution and achieving multiple license tiers[104](index=104&type=chunk) - Services revenue for the nine months ended September 30, 2023, **increased by 6% to $42,053,000**, driven by growth in transaction processing and software maintenance services[131](index=131&type=chunk) - Cost of revenue as a percentage of total revenue **increased to 65%** for the nine-month period of 2023, up from 44% in 2022, due to lower high-margin license revenue and continued investments in offshore personnel and infrastructure[132](index=132&type=chunk) - An **investment loss of $1,701,000** was recorded in the first nine months of 2023, primarily from a Q3 impairment charge, compared to investment income of $196,000 in the same period of 2022[133](index=133&type=chunk) Revenue Comparison (in thousands) | Period | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | **Three Months Ended Sep 30** | $13,399 | $14,450 | -7% | | **Nine Months Ended Sep 30** | $43,847 | $53,940 | -19% | [Liquidity and Capital Resources](index=18&type=section&id=Liquidity%20and%20Capital%20Resources) The company's cash position strengthened to $31.6 million, supported by strong operating cash flow, while continuing its share repurchase program - Cash and cash equivalents **increased by $11.2 million** during the first nine months of 2023, reaching $31.6 million[108](index=108&type=chunk) - The company repurchased approximately **$1.5 million** of its shares in the first nine months of 2023 and has about **$16.8 million** remaining in its share repurchase authorization as of September 30, 2023[109](index=109&type=chunk) [Factors That May Affect Future Operations](index=18&type=section&id=Factors%20That%20May%20Affect%20Future%20Operations) Future results face significant risk from the heavy reliance on Goldman Sachs, along with potential market instability, regulatory changes, and security breaches - A primary risk factor is the concentration of revenue with Goldman Sachs Group, Inc, which represented **68% of consolidated revenues** for the nine months ended September 30, 2023[113](index=113&type=chunk) - Other identified risks include weakness in global financial markets, increased regulation, delays in software development, potential security breaches, and competition[114](index=114&type=chunk) [Item 4. Controls and Procedures](index=17&type=section&id=Item%204%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2023, with no significant internal control changes - Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they are **effective** as of September 30, 2023[115](index=115&type=chunk) - **No significant changes** to the company's internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[115](index=115&type=chunk) Part II Other Information [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=17&type=section&id=Item%202%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company repurchased over 50,000 shares for $1.1 million in Q3 2023, with $16.8 million remaining under its authorized repurchase program - The company has a share repurchase program authorized by the Board, and as of September 30, 2023, approximately **$16.8 million remains available** for future repurchases[116](index=116&type=chunk) Share Repurchases in Q3 2023 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 2023 | 0 | N/A | | August 2023 | 40,298 | $22.05 | | September 2023 | 10,027 | $20.76 | | **Total** | **50,325** | **$21.63** | [Item 6. Exhibits](index=19&type=section&id=Item%206%20Exhibits) Filed exhibits include a key contract amendment with Goldman Sachs, CEO and CFO certifications, and Inline XBRL financial data files - Exhibit 10.1 is the **Omnibus Amendment** to the GS-CoreCard Agreements[118](index=118&type=chunk)[144](index=144&type=chunk) - Exhibits 31.1, 31.2, and 32.1 contain the required **CEO and CFO certifications** under Sections 302 and 906 of the Sarbanes-Oxley Act[118](index=118&type=chunk)[144](index=144&type=chunk)

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