Q4 2020 Earnings Conference Call at 11:00 A.M. EST

Intelligent Systems Corporation

Q4 2020 Earnings Call Transcripts

February 11, 2021

Call Participants

EXECUTIVES

Leland Strange

Chairman, CEO & President

Matt White

CFO & Corporate Secretary

ANALYSTS

Anja Marie Theresa Soderstrom Sidoti & Company, LLC

Mark Anthony Palmer BTIG, LLC, Research Division

1

Presentation

Operator

Greetings, and welcome to the Intelligent Systems Corporation Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Leland Strange, President and CEO of Intelligent Systems Corporation. Thank you, Leland. You may begin.

Leland Strange

Good morning, everyone. Welcome to our call. I need to remind you in the beginning that whatever Matt and I say during this call is a forward-looking statement within the meaning of the federal securities laws, unless, of course, we're stating a historical fact. We will be offering opinions, comments, and analysis that we believe at this time, given what we know or believe today, so that's the -- I'm trying to make the thing that's normally just red tape interesting, as I scratch my head with that. So know that whatever we say, they're subject to a certain number of risk, and we include many of those, but not all of them in our SEC filings. If you have any questions, review the followings, and I hope the lawyer is okay with what I just said.

Now to get to the business of what everyone is signed on for, I'm going to turn the call over to Matt White, our CFO, for a discussion on last year as well as some current expectations. Matt?

Matt White

Thanks, Leland, and good morning, everyone. As we noted in our press releases, our fourth quarter results were in line with our expectations. While we anticipated 2020 to be a building period relative to a very strong 2019, we did not anticipate the impact that COVID '19 would have on our planned workforce expansion and development efforts. We are very pleased with what we accomplished in 2020 and despite unforeseen headwinds, we completed crucial investments in our infrastructure that laid the foundation for 2021 and beyond.

Revenue for the fourth quarter of 2020 was $9,623,000, a 7% decrease relative to the fourth quarter of 2019. However, revenue for the fiscal year 2020 came in at $35,873,000, an increase of 5% relative to fiscal 2019. The components of our revenue for the fourth quarter consisted of license revenue of $2 million; professional services revenue of $4,783,000; processing and maintenance revenue of $2,412,000; and third-party revenues of $428,000.

As we previously disclosed, we recognized $2 million of license revenue in the fourth quarter, which was sooner than we initially expected. However, as a reminder, because we recognized license revenue in the fourth quarter, we do not expect to recognize license revenue in the first quarter of 2021. And I'll talk a little bit more about the license revenue later.

As we indicated during our call last quarter, we saw the impact of revenue declines from Wirecard and the government stimulus program that did not occur in the fourth quarter. We do not expect any additional revenues from Wirecard going forward and have only recognized to date amounts that have been paid or are probable of being paid.

While we do expect additional revenue in the first quarter of 2021 from new government stimulus programs, it is too early to quantify the impact that these programs will have on subsequent quarters of the upcoming year. Similarly, wehave started processing loans for American Express, but it is still too early for us to determine the degree that this customer will impact 2021 revenues.

We do expect continued growth in our processing and maintenance revenues from a combination of new recently signed customers and continued growth from existing customers.

And now turning to license revenue, as previously mentioned, and also disclosed in our January press release, while we do not expect license revenue in the first quarter of 2021, we currently expect a new license tier in the second quarter, and we continue to expect significant license revenue in the second half of 2021.

Professional services revenue did see a dip in the fourth quarter primarily due to recognition -- to the recognition timing of various projects we're working on. In the first quarter of 2021, we expect similar or slightly higher professional services revenue as compared to the first quarter of 2020 when professional services revenues were $5.3 million.

Turning to some additional highlights on our income statement for the fourth quarter of 2020. Income from operations was $2,732,000 from the fourth quarter of 2020 compared to income from operations of $3,979,000 for the same time last year.

Our operating margin for the fourth quarter of 2020 was 28% compared to an operating margin of 39% for the same time last year. The year-over-year change in operating margin was primarily driven by lower revenue and previously announced infrastructure investments in our processing environment as part of our long-term growth strategy. The investments we've made will enable us to take on additional processing customers in 2021 and future years.

Our fiscal 2020 tax rate was 23.2% compared to 18.8% in fiscal 2019. The 2019 tax rate benefited from tax deductions on stock option exercises, which depend on the timing of the option exercise and the difference between the grant date and exercise date fair value. We expect our ongoing tax rate to be between 22% and 24%.

Earnings per diluted share for the quarter was $0.24 compared to $0.41 for Q4 2019, and full year 2020 diluted EPS was $0.91 compared to $1.22 for the full year 2019.

I'd now like to provide a quick update on our liquidity position. Our cash balance at December 31, 2020 was $37,956,000, a significant increase compared to $26,415,000 as of December 31, 2019. As we noted in our press release, we repurchase $1.6 million of our shares, while maintaining significant reserves to weather the current crises and invest in our future.

We also invested $6.9 million in our processing infrastructure in 2020 and opened the recently announced offices in Dubai and Chennai. We believe these newly added employees and locations will allow us to enter new markets, grow our processing capabilities and further expand our offerings on the core product platform. We are still in the early stages with these new offices. However, we expect to start generating some revenue in the second quarter.

Before I turn the call back over to Leland, I would like to give a brief update on the effects we're seeing during the continuing pandemic. Overall, we experienced a relatively muted impact on our business, stemming from COVID-19-related economic slowdown in 2020. And the most significant impact has been on our employees in India that have been working remotely for almost a year now. We're encouraged that we've been able to maintain key functions and business continuity in addition to delivering excellent service for our customers as reflected in our strong professional services revenue. However, we haven't been able to hire and train at the pace we expected before the pandemic, which could impact growth in our 2021 professional services revenue.

We remain incredibly optimistic about our long-term prospects and believe the investments we've made this year will yield new customer wins and revenue growth in the future. As mentioned in this morning's press release, we expect top line growth of 15% to 25% for 2021 as compared to 2020.

And with that, I'll turn it back to Leland.

Leland Strange

Okay. Thanks, Matt. I'm going to make some short comments and then open it up for questions, which you can do on the phone. But another way you can do it is to send us an e-mail [e-mail]. I have my computer open, and I see them as they come in. We're not going to be able to answer all of them, but we'll go until about 11:30.

I always take a look at what I've said in the past before having these annual calls for 2 reasons. I don't want to be repetitive, and I want to check myself for accuracy after the fact.

It appears that the last 3 years, I said something to the effect that we did not believe the year would be as strong as it turned out to be. I think I've said that at the end of '18, '19 and '20. We felt that each year would be good but had no information in January of each year that would justify a forecasted range different than what we had articulated. As I've said before, our budget forecasts were not meant to be either conservative or a stretch, just our best guess based on contracted and business under discussion.

We recognized and commented that license revenue is virtually impossible to predict on a quarterly basis, although we can come pretty close in predicting annual amounts. I emphasize the word close since, again, I've said we don't know how well our current or new customers will grow their portfolios. In many cases, they also lacked good insight on how they'll grow.

This past year is no real exception. As Matt discussed, we received license revenue in the fourth quarter earlier than expected even as late as the third quarter. We thought that would not come until the first quarter of this year. That was good for last year, but it eliminates a couple of million that we expected to come in for this first quarter. As to the year, we certainly did not expect or project the insolvency of Wirecard. That one event put a hole in our projections of almost $3 million.

We also did not expect pandemic-related events that also cost us another approximately $1 million in revenue as one of our customers does mobile parking. And one of their big areas of income is New York. And of course, business loans dried up so the Kabbage revenue went down as far as business loans. Now some of that was made up in other ways, as Matt talked about.

You've heard me repeat too many times that resources are a constraint on growth. With the lower demand on resources by Wirecard, we were able to move some resources to other billable work. And in total, made up the big holes left by that insolvency and the pandemic to still end the year up 5%. I'm very happy with that result. So to come full circle with my comments in past years, we certainly ended up about where we thought we would be, but we got there in a very different way than we expected. Certainly, the fourth quarter license revenue made it possible.

In calls throughout last year, I probably unintentionally underplayed the effect of COVID on our operation as our numbers continue to come in strong. As Matt said, they were -- the effect of COVID muted in terms of our numbers. But also, as he said, it certainly impacted our ability to grow 2021 as much as we had previously thought. A lot of business went into slow motion and making strategic moves to change processors became more risky for potential customers, plus we did not get a substantial number of new team members sufficiently trained to handle big new opportunities.