CoreCard Corporation (CCRD) Earnings Call Transcript & Summary

All right. Good afternoon, everybody. Thanks for joining us for this session of the Morgan Stanley Fintech Conference. Very pleased to have CoreCard with us and joining us from CoreCard is Leland Strange, CEO and President; as well as Matt White, CFO. Before we get to talking about the business, I do have a quick disclosure to read. Please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep.

So Leland, let's start with you. Why don't you give us an overview of the business and the services you provide, and just talk about the company in general?

Sure. I'll give you the one-line marketing pitch to start with. We're seeing that we're the gold standard for modern issuing processing. And that differentiates us from -- 2 different categories. One is the legacy guys, which we don't say is modern. And by the way, everybody other than legacy has to say modern, because markets have started saying this. So we all say it.

So you all say modern, right?

We all say modern, yes. And it will be probably 6 months before we all have to say some of that AI. But anyway, we do think we're the gold standard. And the way we differentiate between legacy is the fact that we do have a modern platform. What does it mean? It means that you can be more agile, you can do things more quickly for folks. And the way we distinguish ourselves from the other modern platforms is that we're very deep in credit. Credit is by far the most difficult of the financial transaction things you can do versus debit and all the -- and we do all by the way. We do debit, we do Buy Now, Pay Later. You name it, we do it. But deep credit is the hardest thing in terms of -- there's just tons of edge cases, and there's a whole lot of regulatory that surrounds credit that doesn't -- that's far more extensive than regulatory run of debit card and things like that. So the other newer folks on the block do some things very, very well. They do -- they can do debit very well. It means you've got a ledger. It means you can do it fast, you keep up the money. But they have difficulty doing really, I want to say, complex credit, and I really just means something beyond just a simple speed card or just simple type credit. So that's kind of our bread and butter is the more difficult credit and our proof of that, of course, we did the Apple card, which has a whole lot of things that are different, and they were new at the time we did it. Other people copy it. But basically, we were the things that other folks could not do. But I'll backtrack there too and say, it's software. So what can you say -- you could do anything. You can do anything everybody else can do and they can do anything we can do. It's a time issue. The legacy guys obviously can do exactly what we do for Apple, but it would have taken them 3 years, and we can do it in less than a year. So it's around the edges that you get there. And in fact, another analogy that I guess one of your question is probably going to be, how are you different and I'm sort of getting…

That is my next question.

Yes, I'm getting ahead of you with that. And so now, that's all the marketing stuff. Let's talk about the real stuff.

Right, right.

I like Diet Cherry Dr. Pepper. My wife cannot stand Dr. Pepper in any form or fashion. She does not cook. Obviously, Dr. Pepper has a cherry flavor. It appeals to some people. It appeals to me. They're both colas.

Right.

I think Diet Dr. Pepper probably has a 2% market share, and Diet Coke has maybe 8% working share. But my point is, it's -- they're both colas. The differences are hard to really discern other than you taste it and like it or don't like it. Some of our customers are people we talk to, they'll come to us and say, "Well, I'm with somebody else and I don't like this." The next guy will say, "I'm with them and I don't like this." Next guy will say I don't like this. They're all different. So there's no one single point of focus that would set us apart from everybody other than fact that we've got deep experience in terms of both conversion of large portfolios, and that was the GM card. And there's no other modern processor, issuer processor that's converted a large portfolio. And then the fact that we're doing the Apple card, which is reasonably complex. So we've got experience there. And then we've done them fast. So that's sort of our flavor, deep in one hand and fast.

So can I ask you on the Apple Card, it's interesting that you guys are doing the issuing on that. Like what are the complexities around the Apple Card that make that unique? And then how are you able, if you can, or how would you want to get leverage on that relationship to others?

The leverage really is just showing that we could do something that was very complex very quickly. So it's not a matter of Apple per se. And I go back to my explanation about slightly different taste. There's no one thing, but there's a lot of little things put together that you may or may not want. And here's one of the little things. Apple wants all of their cardholders, 10 million, 15 million, eventually 25 million, unless they change their mind to get all of their statements on the first day of the month. Now think about this. So it's the 30th or 31st, starting cut off at midnight, you have to take all the payments that are made that day, that last day because customers know that's the cutoff date. They'll be charged interest if they go forward. So you can imagine there's millions of payments made on that last day of the month that had to be put into the ledger immediately after midnight and then you have to start processing their statement, calculate interest. Apple wanted every one of their customers to get that that first day. Nobody else can really do that. Now think if we had to do that now, and it's not something we've ever done. We had to do a lot of work on that, too. But if you're -- if you think about processing, I'll just use a number, 12 million statements, 15 million statements in a period of 10 to 24 hours, whatever, but less than 24 hours. That's a pretty difficult task, even with mainframes. And then -- I mean, there's a reason that if you got mainframes, you spread out your statements, the second, the eighth or seventeenth or whatever, so you can keep the power going. If you use microcomputers and network cloud, you can't afford to do surges without a whole lot of extra expense. So that's one. The other was -- is the rewards and the way they did it was different than anyone else than now chasing some other people do it that way. And that's really the way this business goes. It's whoever wants to be the leader in terms of new types of uses of the card. They're really going to copy it, just a matter of time. We think we can get people in the market faster with newer things than anybody else.

And what's been your experience? Because a lot of times, what we've seen when new issuing companies like CoreCard or Marqeta, et cetera, come to market, they do pretty well winning business for new products or new services in the market. But you mentioned the GM card win, that's pretty atypical. Like you don't see a lot of those portfolios shift to new issuers very frequently. Like what's happening from that perspective?

Well, you don't, and there are good reasons. I end up -- I kind of say that someone who consciously make a decision to shift a big portfolio is really betting their career on that decision.

Yes. No, it's big…

That's a hard decision for folks, and there's no reason to make that decision unless you want to be innovative and a leader. There are folks we talk to. I tell them quite frankly, let me give you a cheap price and you go back to legacy guys, tell them you can get it for this and you stay with them. Because you're not going to come to us. It would be stupid for you to come to us. And I don't want people to come to us if it's a bad decision. So you really make the change if you're -- if you truly want to be an innovative leader. And there's a few of those out there, but it's not everybody. It's back to market share when I said Dr. Pepper has got 2%. Well, somebody else has got the other 98%, but that 2% is a pretty big number for that diet. So we look at it like, okay, there will be some folks along the way who will make that decision, as GM made that decision. Now by the way, they didn't make it just for us. They made it because of Goldman, gave them a deal on their receivables, what they really wanted, they booked receivables. But there's a story there in the sense that they were being processed by TSYS, Capital One. They really didn't want to move processors even if they move. Because 10 years before this time, they had moved from Barclay to Capital One, and it was horrendous. They lost. So what happens on the conversion, what you worry about is losing customers. Customers are expecting to get. So you don't want to do a conversion where there's a risk that you will lose customers. We did the GM conversion, just virtually 0 problems. There are always a few little ones. They were cut on the side. That at least gives someone else who's making that decision that confidence to say, hey, I've seen them do it once and it worked. But the reality, we have to build our business brick by brick. I've got to get another one of those. Then another one this small, that one big. I needed a couple of small ones. So people say, "Hey, they've done 3 of them with no problem." Now I'm not really betting my career -- well, I maybe making that bet, but it's a better bet than it would be for us now. So that side of the business is going to be hard -- it is hard to get, and you'll get it slowly. And those contracts are fairly low.

And can I ask like in that particular case is like it sounds like there was something in that relationship with Goldman and you that kind of made sense for them to make that change. Like what were they like looking at? Because it sounds like it was like there was an AR component to what they was really driving the decision, but kind of why do the issuing as part of that as well?

Well, it's always -- someone's going to own the receivables. And that's really all the big guys care about. They don't care about who's processing them unless there's some problems. They really just want to own that receivable. So Capital One on #4. Goldman made a deal, which I'm not privy to in any way to take on those receivables. Now the key -- in terms of our target is that the folks that are being processed by TSYS generally, we know TSYS doesn't own receivables. So somebody else owns receivable. So it's a matter you have to have your bank be comfortable as well as the customer. But again, we're cutting on and the calls I get kind of confirm this. The fact that we can do some innovative things will encourage some midsized bank, not some large bank. It sounds funny, but I'll tell them, well, you'd be stupid to do business with CoreCard. It's a risk you shouldn't take. Probably you can handle it, but it's just not a risk that you as a manager should take. But it's a reasonable risk for a midsized bank to take to be able to say not only do we have to tell the Board we're innovative and say we're innovative, but we really are, because everybody says it. I tend to think only 15% of the midsized banks are really innovative, really wanting to do what it takes to be innovative, despite what they say.

So I want to use that as a way to segue to talking about and moving the conversation to the banks. Given all the pressure we've seen on regional banks, how are you viewing your clients' risk appetite right now? And how is it impacting your ability to win new business?

There's no question, given what's been happening in the marketplace that taking additional risk is not something anybody wants to do. But we were in a situation where the card folks, the IT folks would say, "I think it might make sense for us to do something to CoreCard." I am positive, the Board of Directors said, "Nay, nothing. I don't want a headline about anything. I don't want headline that says we're innovative. I don't want a headline that says we changed our processors, lay low." So I think generally, that's what you could find from the bank board room down through the executives, let's don't rock the boat. That does impact us, no question about that. There's still enough new, call them, new innovative things, smaller guys that we're doing business with, and there are some other things. For example, we are working with one I don't know how to size it, better but medium to a small bank in terms of a very innovative commercial card. So some of them will do it. Now they're still being -- they're processed by somebody else. They're not happy with it and they can't get the features they want. So we're going to be introducing it sometime in the fall with some brand-new things that Visa is doing as it would be a commercial part. So there's plenty of business out there. There's just not -- there is a tempering of appetite for risk, no question.

Is there any type of circumstance or in part of the environment that there's more activity than you would have guessed it would be based on the headlines from a few months ago?

No, I think it's pretty much kind of flowing down to what we do expect. Yes.

Okay. So then on your business, how do you think about managing the business in a worse macro environment? And how are you responding to the stress in the macro and banking sector?

Well, I don't know that we're responding to -- that we have to or we are responding to that, particularly because of that, but we are just simply managing the business appropriately. And Matt may talk -- can talk about that in terms of headcount, things that we're doing.

Yes, we're trying to keep our head count steady this year and grow our revenues without adding a lot of people. We added 300 last year, mostly in India. But the way that we charge our customers is typically based on a number of accounts. And so if the spend volume comes down, that doesn't have a big impact on our revenues.

That's a big thing to talk about in terms of differentiation and that we don't make money based on the size of the transaction, total spend. I know you talk to Citi, you talked to different folks about, well, how do you see spend and whatever. We don't even look at that. I don't know how many billions of dollars my customers put through. I know how many accounts they have. So we charge in most cases, a couple of exceptions. In most cases, we charge based on a number of accounts.

Number of active accounts. Accounts tend to stay active even in a depressed macro environment. So we're pretty steady.

Steady that way. So talk to me about the relationship with Goldman. How did that come about? And did that -- and I guess what are you providing there? And what are the opportunities on an ongoing basis?

Where it came about -- I can -- I'll have to just kind of skip through some things as well. I think there are some folks at Apple through certain kinds of relationships, knew what we did in that space. We had a customer -- a small customer who is in Silicon Valley that also had a very innovative program. They also had contacts at Apple, and they had contacts with Goldman. Someone else at Goldman, indirectly new CTO, who knew us, so I just got a call that said, could you guys process 25 million accounts? Now remember, we never processed more than 1 million. And -- but the architecture we had should give us an unlimited number. So from there, we had conversations and had to convince them that we can do that many. And the conversation really was not, yes, we can. The conversation was, yes, we can with your help. We're not going to be arrogant telling you we could do a whole lot of things we've never done if -- but prospectively, we could. I don't know that we can really leverage that anyway other than here are 2 organizations that have probably some of the best technology folks in the world…

Yes, for sure.

Who took a tremendous gamble on a small processor down in Norcross, Georgia, which by itself says a lot about the choice because it was not a price discussion. It was a technology discussion, very simple. And we know that they had talked to other processors who clearly wanted the business. Now that may have been a price discussion too, because Apple can be pretty tough generally, but they offered them something they couldn't offer. So we were able to get a fair price for what we think is a premium product. In fact, I often say we have -- we charge premium pricing, but we have a premium product, and that product is not just a software. It's overall, how we give our customers.

Right. So maybe just to wrap up here. So how should we think about the long-term evolution of margins and profitability in your business? And what are the levers that you can pull to keep improving that?

Well, I'll let Matt follow up. I'm just going to say we don't even think about it at around $60 million to $65 million in revenue because if we're to double that, it really won't matter. Go ahead.

Well, we expect to remain profitable as we have for the last 5 years -- 5-plus years, not all of our competitors can say that. I mean if you look at the legacy guys, their issuer processing businesses, they have margins, EBITDA margins in the low 40s. That's what we expect ultimately.

Ultimately. But like you're saying is that you're at a revenue run rate that you're profitable, but you really start to get leverage when you're about double digit?

Yes.

Yes. Very profitable. We're not worried about our margin now. We're going to keep doing the right things to build a bigger, much bigger…

Investing for the long term.

Yes. No, that's right. That's right. Any -- just to wrap up then on the last, what is the growth driver? How much is does M&A potentially make a difference versus everything organic?

Well, M&A goes both ways. I mean somebody could buy us or we could buy somebody. Pricing generally is -- it's still not reasonable in my view. So the idea of buying something is probably not going to happen. We're open to it. We've got cash, lots of cash, and we'll remain profitable. But I just don't think there are lot of opportunities out there.

Yes. Just the valuations haven't really got…

Exactly.

Great. Well, that's all the time we have. Leland, Matt, thank you so much.

All right. Thank you.

Thanks.