CoreCard Corp $CCRD
A valuation into CoreCard Corporation
CoreCard Corporation is a software company that specializes in card management and transaction processing solutions. The company designs, develops, and markets a suite software solution to program managers, accounts receivable businesses, financial institutions, retailers, and processors to manage their credit and debit cards, prepaid cards, private label cards, fleet cards, buy now pay later programs, loyalty programs and accounts receivable and loan transactions. CoreCard’s corporate headquarters is based out of Norcross, Georgia with affiliate companies in Romania, India, Dubai, and Columbia. They currently maintain a workforce of around 900 employees. In 2021, CoreCard went through a name change and rebranding although their underlying financials did not change. Their previous name was Intelligent Systems Corporations and traded under the ticker symbol $INS. CoreCard has a singular focus to be the most agile and deep financial platform for the processing of money available with particular expertise in credit.
CoreCard’s proprietary software applications are based in their core financial processing platform CoreEngine. The platform allows companies to offer transacting account or card issuing program as well as installment and revolving loans, to set up and maintain account data, to record advances and payments, to assess fees, interest, and other charges, to resolve disputes and chargebacks, to manage collections of accounts receivable, to generate reports and to settle transactions with financial institutions and network associations. Furthermore, CoreCard’s software offerings include additional functionalities such as embedded multi-lingual, multi-currency support, web-based interface, real-time processing, complex rules-based authorizations, account hierarchies, documented APIs for easy integration to the backend functionality and robust fee libraries. These features support customer[1]defined pricing and payment terms and allow CoreCard’s customers to create new and innovative card programs to differentiate themselves in the marketplace and improve customer retention. CoreCard products are designed to run on lower cost, scalable PC-based servers, rather than expensive legacy mainframe computers. As a result, the customer often benefits from lower overall costs since the solution provides scalability by adding additional servers as card volume grows. In my opinion, this makes CoreCard a highly appealing solution to small businesses just starting out but focused on scalability and growth.
CoreCard’s solutions are offered in the form of licenses and as a service. Licenses include the sale of software to a customer to run inhouse. This often requires personalized configuration of the software to fit the business’s needs. CoreCard has stated that it is working toward de-emphasizing the licensing option in favor of the service options. The processing service allows customers to outsource their card processing requirements to CoreCard.
CoreCard’s target market includes consumer revolving credit portfolios, accounts receivable businesses, prepaid card issuers, retail, and private-label issuers (large and small), small third-party processors, and small, mid-size and large financial institutions in the United States. CoreCard has customers in international markets as well. Goldman Sachs Group, Inc, is the company’s largest customer coming in at 69% and 71% of revenues for 2020 and 2021. I would consider CoreCard’s substantial revenue concentration in such a single customer to be a potential threat to the company. CoreCard states that they expect “future professional services, maintenance, and license revenue from this customer in 2022 and future years, however the amount and timing will be dependent on various factors not in our control such as the number of accounts on file and the level of customization needed by the customer.” The financial health of Goldman Sachs Group will be something I monitor assuming an investment in CoreCard. The second largest customer makes up 6% of revenues according to the most recent 10K.
Additionally, CoreCard has relationships with several financial institutions important to network certification, (including Discover, Visa, MasterCard and more) referrals for processing or program managers, and sponsoring card companies. Revenues can vary depending upon the size and number of software licenses and professional service contracts recognized in a period. Other customers include Red Hat Inc, Gemini (company owned by Winklevoss twin), Westlake Financial Services, and California State University. According to a Enlyft report, CoreCard has an approximate 27.38% market share in the banking and finance sector. The report broke down sectors that commonly used CoreCard software. The top five sectors in order are IT and services, software, hospitality and health care, construction, and financial services. I am NOT putting significant faith in this report as I can’t verify much of the information in it or the exact date of its publication.
In 2021, CoreCard recognized $42.3 million in revenue from services, a 31% increase over 2020 lead by greater processing, software maintenance, and professional services. Revenues from products or licenses was $5.8 million in 2021, a 63% increase over 2020. Cost of revenue was 47% for 2021 which was up from 43% in 2020 primarily due to increased investment costs made in processing infrastructure. Operating Expenses were also higher primarily the result of increases in research and development as well as higher salaries due to increased headcount. CoreCard also increased its marketing spend.
In 2015, CoreCard, known at the time as Intelligent Systems, sold off its largest operating subsidiary, ChemFree Corporation. ChemFree Corp. manufactured and marketed a line of parts washers and solvents under the “SmartWasher” trademark. The sale of ChemFree was determined to be of excellent value to shareholders and gave the company the opportunity to focus on its CoreCard business. Since the sale of Chemfree, CoreCard has grown revenues consistently in both its product licenses and service segments. We can see the result of ChemFree’s sale in the chart indication earnings per share.
Over the past decade, CoreCard has experienced an overall net increase to revenue driven by growth to its customer base and service volume. On average there has been an average annual 25% increase to revenues. I expect revenues will continue an upward trajectory but slow in the coming years. Earning per share have also grown. Margins have been relatively steady for CoreCard, although slightly down in the past two years. Compared to other companies in the space, CoreCard has competitive margins and certainly some of the most consistent. Return on equity and return on assets are up slightly on a net basis and are also relatively competitive compared to competition. Return on invested capital has fluctuated but averages around 20%. My own calculations put ROIC around 65% but I intend to use something much more conservative for my discounted cash flow model.
Over the past decade, CoreCard had grown its free cash flow although it is down in 2021. CoreCard does actively repurchases its shares. In May 2022, the board authorized $20 million for share repurchases following a $10 million authorization from April 2021. Approximately $20 million remained as of June 30, 2022. CoreCard does seem to be undervalued at its current price, so I expect the company has been very active with these repurchases. CoreCard does offer a stock-based compensation program to of which there was expenses of $318k and $386k for 2021 and 2020. I don’t expect that these stock-based compensation programs will dilute shareholders in any significant form.
When modelling out a fair value for CoreCard I came up with an estimate of $35. This is assuming a ROIC of 20%, WACC of 10%, 15% variable growth rate, and operating margin of 45%. From a historical perspective on the company, this is a conservative estimate, but I prefer it that way due to uncertainties among the company and general market. At CoreCards current price of $24.32 my fair value estimate would give it a margin of safety of 30%. I do view CoreCard as a growth company among software and fintech industry which is constantly being disrupted. With regard to valuation ratios, CoreCard trades to the low end of its historical price to earnings. Price to sales is also to the low end of its historical average and price to book is in its historical midrange. CoreCard is a small cap company, (some may consider it a micro-cap being under $300 million). The company has institutional ownership of approximately 44.5% and insider ownership of approximately 28.2%. This information varies depending on where you look but they are within a few percentage points. Average daily volume for CoreCard is quite low, coming in at 24.5k.
In addition to CoreCard’s core business operations it holds some external investments as well including a 40 percent ownership interest in a privately held identity and professional services company with ties to the FinTech industry. In 2021 the mentioned company transferred its advisory business to a new entity. CoreCard contributed our notes receivables of $2,806,000 and $800,000 of cash for a 28% ownership interest in the new entity. CoreCard Continues to hold a 40% interest in the initial entity which continues its operations in the events and media space. Also in 2021, CoreCard invested $1,000,000 in a privately held company that provides supply chain and receivables financing.
As I mentioned before, one of my concerns and potential threats to CoreCard’s business model is its substantial dependence upon a single customer for revenues. Although unlikely, the drop of CoreCard as a customer would have material effect on revenues. CoreCard reportedly has over 13000 customers and continues to grow this base. Personally, I would like to see a customer base that is more diverse and less dependent on a handful of customers. Due to the level of risk here I could rationalize CoreCard having a hard time reaching its fair value. Some other risks to consider include weakness or instability in financial markets, increases in state and federal regulations, reluctance by financial institutions to act as sponsor banks, delays or failures to deliver software products and services, security breaches, failure to retain key software developers, competition, delays in customer payments, and others.
All in all, I think that CoreCard is a solid company with optimistic growth prospects and a strong balance sheet. The company carries no debt on its balance sheet and has been able to fund much of its growth through current cashflows and revenue. Something that I find interesting about CoreCard’s management is that they do not employee a significant amount of salespeople or marketing. The company is picky about the customers that they take on and seek customers that offers the most strategic opportunities for CoreCard. I am indifferent about this approach, but I feel it shows management has a strong focus in allocating recourses in an effective matter to benefit both their current customer base as well as shareholders. CoreCard has placed its business in markets that are likely to experience high growth in coming years. India is one of these developing markets and is expected to be a major economy in the next twenty years. Many aspects of CoreCard’s revenues are recurring in nature. Both the licensing and services bring in additional monthly fees especially in processing activities. This does give management some level predictability for revenues, and I expect this will increasingly be the case as they bring on more customers. More customers equal more processing fees and services, and that equals more revenue. Compared to competitors in the space, CoreCard is in a much more financially sound company, and I am more confident in its ability to weather an economic downturn. It is also nice to see that the company is actively returning capital to shareholders in its share repurchases. As far as its offering go, CoreCards software and services appear to be some of the top in the world. The company boasts that it has not lost customers to a competitor service in over a decade. CoreCard’s current margin of safety is appealing, and I have no doubt that the company is undervalued. Moving forward, I intend to watch future reports and press releases for continued customer growth and diversification. I expect that the current economic environment has headwinds to come that won’t benefit CoreCard and as a result there may be more opportune times to consider a position.