Description

I have kept some factual/background information below relatively light given a post earlier this year from VIC user zipper.

Brief Description

CoreCard Corp. (CCRD; f/k/a Intelligent Systems Corp. (INS)) is a program management and processing software and services provider for credit/debit/prepaid cards, BNPL and loyalty programs, and consumer finance products (e.g., loans, A/R management, collections/recovery). Specifically, CCRD helps customers maintain account data, record payments, assess fees, resolve disputes, manage collections, settle transactions with institutions / network associations, etc. CCRD also licenses these solutions. Customers include financial institutions, program managers, A/R businesses, retailers, and processors.

Reported revenue streams include:

• Professional services: fees charged to customers to periodically modify/enhance software based on customer strategy/ops requirements;
• Processing and maintenance: implementation/setup fees plus recurring monthly service fees, primarily based on number of accounts, collected for managing customer transactions (e.g., interest, fees, settlements, collections, etc.);
• License: recurring fees based on number of seats, customer accounts, and/or software modules licensed charged to customers that manage their own processing/programs using CCRD software; and
• Third party: various other program-related services (e.g., monthly statements and card production).

Summary Financial Position and Performance

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1. Source: CoreCard filings. Unless otherwise noted, balance sheet data is as of 9/30/22.
2. Includes 8.513M common stock (as of 10/31/22) and 0.026M options as calculated using the treasury stock method.
3. Includes <$1M promissory note at 4.6% due Oct-23.
4. Includes $27M cash and $1M marketable securities.
5. Adj. to add back non-recurring/non-cash expenses, including stock-based compensation expense.
6. Forward estimates reflect consensus Wall Street research.
7. Assumes dividends are reinvested as of the ex-dividend date.

Investment Thesis/Risk

CCRD’s valuation is a tale of two stories about the same fact: its customer concentration. Specifically, CCRD’s largest customer, Goldman Sachs (for its Apple Card), represents ~76% of LTM revenue.

The noise:

Concentration at this level is, without context, is unusual and alarming. I am unsurprised if some investors balk immediately or that holders may be sensitive/skittish. This was demonstrated in late March 2022 when a rumor that Goldman planned to bring some processing tech in-house sent CCRD shares tumbling, drifting off for months until experiencing a muted recovery in 4Q22.

The signal:

(a) CCRD was chosen by two of the most well-known, premium US brands at launch as the processing and program software for their prestige credit card

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(b) The Apple Card launch is largely regarded as one of, if not the most successful US card launch of all-time

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(c) A customer win of this degree signals: (i) the quality and scalability of CCRD’s offerings and (ii) the de facto magnitude of the concentration.

This begs the question of (1) the defensibility of CCRD’s position with Goldman and (2) its prospects at diversification.

(1) Defensibility

First and foremost, it has been nearly three quarters since the rumor of Goldman moving in-house, and there has been no further news on the matter — CCRD is still Apple Card’s vendor. Further, Goldman does not have access to CCRD’s code. Additionally, several experts have speculated that replicating the level of complexity CCRD’s software can handle, as well as its flexibility, even for customers with access to significant and cheap capital, would take years. I find it more likely that Goldman buys CCRD before they disintermediate them. Regardless, CCRD’s Goldman revenue has continued to grow at a CAGR far outpacing that of the rest of CCRD — by nearly 8x since the buildout began in 2018 (past <4 years) and, still, by >6x since launch (past <3 years).

(2) Diversification

As discussed above, I believe CCRD’s Goldman success should ‘signal’ to customers it is a vendor of choice, which should facilitate new business, diversifying revenue, and in turn, allaying investor concerns around Goldman concentration. In fact, CCRD launched a new card with GM earlier this year and announced in August 2022 that it is planning to launch a co-branded American Express card; the associated integration/buildout will expand CCRD’s universe of cards they can service to those on the AMEX network given CCRD has only operated on the Visa and Mastercard networks to date. From here, CCRD must execute on additional customer wins, and their progress in 2022 is encouraging.

Valuation

As zipper alluded to in their post, some investors view CCRD as a lower-tech BPO-esque company, especially given its high headcount. Given the evidence presented in zipper’s post as well as above regarding the high scalability, complexity, and flexibility for which CCRD has become known, I reject these investors’ view. If channel checks, customer accounts, etc. are insufficient for investors as evidence to the contrary, I pose: how many BPOs have a revenue CAGR of nearly 40%, gross margins in the mid-50% range, and Adj. EBITDA margins in the high-30% range? CCRD’s financial profile alone communicates that the stock warrants a valuation in line with premium card processers / fintechs. To that end, I find CCRD’s 7.3x 2023E Adj. EBITDA multiple to represent a significant discount to intrinsic value, as well as potentially overstated. To the latter, the Street has for many quarters now given CCRD (1) no credit for incremental business and (2) inaccurately predicted the maturation of Apple Card growth. As such, CCRD has had positive revenue surprise in 11 of the past 13 quarters and by a significant magnitude ranging from HSD to 50%+. My 2023 estimates suggests CCRD’s forward multiple may be in the low-6x range, an even steeper discount to where I ultimately believe CCRD should trade, a peer multiple of ~10x. Note also that this prevailing multiple, given today’s environment, is depressed from historical levels, and while I do not expect CCRD to ever reach the high-teens multiple historically earned by premium payments companies such as the large cap Global Payments (GPN), among others, I believe a more favorable macro environment could eventually facilitate a low-to-mid-teens multiple for CCRD. In the interim, holders should enjoy sustained, compounding growth in cash flows and a reasonable re-rate that should drive CCRD to the low-$40+/share, or a mid-40%+ premium to current shares, in the near-term.

Catalyst

> Customer wins and diversification

> Continued earnings beats