Avi Fisher from Long Cast Advisors on CoreCard $CCRD (podcast #142)

Avi Fisher from Long Cast Advisors joins the pod to talk about CoreCard (CCRD). Key topics include the risks and opportunities from their Apple Card / GS relationship and the benefits of the CEO’s measured growth approach.

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Transcript begins below

Andrew: Hello and welcome to the yet another value podcast. I'm your host, Andrew Walker. If you like this podcast, it would mean a lot, if you could rate, follow, subscribe, review wherever you're watching or listening to it. With me today, I'm excited to have my friend, Avi Fisher. Avi is the Portfolio Manager and as he told me the Chief Curiosity Officer at Long Cast Advisers. Avi, how's it going?

Avi: Great. Thanks for having me, Andrew. I really appreciate it.

Andrew: Thanks for coming on. I really appreciate it, as well. Let me start this podcast the way do every podcast. First, a disclaimer to remind everyone that nothing on this podcast is investing advice. That's always true, but Avi really specializes in small-caps and nano-caps. And the company we're going to talk about here is about a 250 million market cap. So everyone should just remember, that's particularly true today because micro-caps come with a little bit of extra risk. So please do your homework, consult a financial advisor. This isn't investing or financial advice. And then, the second way I start every podcast is with a pitch for you my guest. We were at a dinner a few months ago and you told me that your wife had a minor surgery. Everything's okay but you were telling me how the surgeon came out. You and I are both interested in a company that makes surgical screws and you were just pinging them on, "Hey, what type of surgical screws are you? What type of driver did you use?" And you were just pinging them on not and eventually the surgeon was like, "Is this man trying to steal intellectual trade property secrets?" And I was just thinking to myself, "Any man who would take his wife surgery as an opportunity to do a little extra customer due diligence on a company is the type of man I'd love to have on the podcast."

Avi: I didn't push her. I didn't knock her over.

Andrew: If you cause the surgery, that's a different type of man. But the company we're going to talk about today is CoreCard. The ticker, despite my earlier mishaps on Twitter, the ticker here is CCRD. I'll just remind everyone 250 million market cap, so please be careful of this size in a little quantity. I'll turn it over to you, Avi. How'd you find them and what's the story with CoreCard?

Avi: Happy to talk about it, Andrew. First of all, thanks for having me on. I really appreciate the time. Listened to a few of your podcasts and you have a lot of great guests and have a nice conversation. So look forward to this one. Before I dig into CoreCard, which I should say that I own, I want to talk a little bit about the framework that I use for evaluating stocks. I'd be keen to hear how it messes with your framework for a value of stocks, as well. I think CoreCard fits right into that framework so well, that it's an opportunity to start with this broad level and then drill down into CoreCard.

So the three aspects of identifying stocks is identifying the right idea. Try to value that idea and then understanding the appropriate size to add it to the portfolio. There's a lot of literature around identifying the right idea. I have a library of books behind me. I've read Lynch, Fit, Greenblatt, all the classics. Spend a lot of time talking about how to find an idea and evaluate them to a lesser extent, but still importantly they assess how to evaluate them. But very few of them also touch on, how do you size it within the portfolio? So I just wanted to address that very quickly. I'm not going to add much to what they've written about identifying a company. Everyone, hopefully, who's listened to this, if you haven't read the classics of Graham, Buffett, Greenblatt, Lynch, and others, you should. Don't hear it from me, you could hear it straight from the experts themselves.

A few of the things that I do add on to it, I'm not going to say I'd do it differently. But add-on is the quality of the management team is critically important to me. Some of that is driven by my background. I was a writer and reporter and spent a year working as a private investigator where our clients were some hedge funds, some private equity funds. They just wanted to do qualitative due diligence into the management teams that run the companies. And what I observed in that year doing this is that, it's not so much that people who are successful remain successful and people who are failures remain failures. Although to some extent, you like to see that but it's the people who don't tend to change their behavior very much. If you can just assess their behaviors around decision-making, around who they hire, around their strategies, those tend to repeat themselves. So, it's really important the way I assess a company is to first try to assess management and pull out some of the tools I use from back then.

And then another thing that I look for again, I'm not going to repeat the Greenblatt, Buffett, Lynch frameworks. Those are well articulated. But I also prioritize companies that are careful with their share count, non-dilutive. Buffett has talked about in a right terms, how the cost of dilution for a successful company down the road is like the compound, the cost of it. I want my managers to understand that. If they're believe in themselves and believe 5, 10, 20 years down the road, this is going to be worth a whole lot more than diluting the stock today, unnecessarily. Or if there are other alternatives to finance scene is that cost today. I really like to look for companies that are really careful with their share account.

Andrew: Just on the share account, I agree with what you said on management quality. And it's very tough because we're learning this year some of the managers that people were just worshipping 12-18 months ago. Maybe they were just really riding a bull market and I don't mean that in terms of portfolio manager, maybe that too. But a lot of the managers when everything was going for 20 x EV to sales, they seemed great. They are turned around. But on the share count thing in particular, anyone who's listen to this podcast for a long time knows, the most common question I asked is, why aren't they buying back shares if the stock's so cheap? It's underrated, just like managing your share count. I love it when you hear managers talking about per share value, growing per share earnings, all this sort of stuff instead of just growing earnings overall. Anyway, completely with you on that piece.

Avi: Those aren't the two factors I focus on, but in addition to the entire body of work that's been written before. That I think really nails the fundamental structure of securities analysis. These are two factors on top of it, that I think are really important to me.

Andrew: You also focus a lot on micro-caps and anything under 500 million dollars, really. It sounds trite to say, "Oh, management really matters there." But I do think management quality matters just a little bit more under that because under 500 million, you really can't wage an activist battle there. Management's almost entrenched themselves just on the size of the company. So, if you don't trust them to maximize per share value, you don't trust them to maximize minority shareholder value. I have seen 70 million dollar companies that were probably worth 300 million dollars to a third party, but the management team just kept managing to suck all of that value out for themselves. It really does, it even matters more in terms of when you're dealing with these smaller companies.

Avi: Yes and I've learned in my seven years at Long Cast Advisors of that. I'll talk about the firm briefly in a minute. But in my seven years doing this, I have spent a little bit of time and it's always been in retrospect a total waste of time trying to engage the management teams of the companies I own when they've done things, that didn't make sense to me. What I've learned in my seven years doing it, is if your management team, and this is my view, some people are very successful. Good, want to spend their time on activist. But I've come to a place where, if I have a management team that is not operating in a way that makes sense to me or if they're churning strategies, every quarter, every year, a new tack, a new spin, a new shiny object, I just walk away. I don't have the bandwidth. I don't have the time. It's not worth the frustration. There are better ways to allocate money.

Again, another aspect and I'll touch on this later is the importance of IRR. And I just think there's a better IRR usually, finding better ideas and it is fighting the management team. If I don't have the capital to hire good lawyers and do the fight, it's just not for me. I happily get behind other people who are willing to do it and I know many people are doing it. I think Tim Ericsson is one. I don't understand, he does an amazing job in the micro-cap space waging activist campaigns among other people. I think Jeff Graham has done it before. Again, incredible outcomes, just it's not my cup of tea. It's not my ball of wax.

Andrew: I think you've mentioned you wanted to talk a little bit about Long Cast overall, as well.

Avi: Yes, I'd love to. I started Long Cast Advisors in November 2015, so seven years ago. I'd spent about a dozen years on the sell-side after working as a reporter, after working as a writer, fell in love with investing. There's funny story but it's a little too long so I won't share right now and remind me to tell it to you some other time. We wanted to transition to investing and so a lot of people said, "Get an MBA and call me." I wanted to take an incremental approach to it. I always do with most things in my life. And I just started to take steps in my career to transition there. That included working as a private investigator, then working in PE, doing it in-house. And then, I got a job at Credit Suisse on the sell-side, '99 and two years there. Two years in business school and then eight or nine years at Bank of Montreal all covering industrial products and industrial services type stuff. And then, spent a little time figuring out what to do next, wanted to work on the buy-side.

I met a few people. I'm really not much of a name dropper, I apologize in advance. But I met this young kid named Josh Tarasoff, who's not just a young kid anymore, but a very successful Fund Manager. He was introduced to me through a mutual friend. Him and another person, whose name I forget. Both of whom set started with 2 million at the time. I think Josh had grown his 2 million to something like 20 million back then and the other guy... And he said... He still is a very kind person. "You don't need experience on the buy-side. Trust me, you don't need it. Just start your own." And then, I met the other guy and he'd rode his two million to 1 million. And he said, "You don't experience on the buy-side. Start your own, it's the best job out there."

I never got there. I ended up getting a job on the buy-side. On the first day there is when I realized what everyone had been saying to me all along. That until you're managing a portfolio yourself, you can't really understand the pressures of doing it. My first day at that place, I got a peek behind the scenes and I saw a portfolio that wasn't wholly matching what the presentation and marketing material was. And it just sort of, the light went on in my head. It was like, "I'll never understand what pressure this person face to lead to a portfolio that looks like this until I'm managing outside money. Otherwise, I'm just an analyst on the other side of the desk of whether I'm on the buy-side or sell-side. It's really not that different." So I realized this was the way to move my career forward.

Seven years in, still running your own business in whatever field. It's incredible experience, lots to learn everyday. It satisfies a need, curiosity especially on the investing side, but it's a challenge, really hones the experience of business and life. But again, it's not just investing. There's great investors who dart managing large pools of money. There are people managing large pools of money who are a great investors. I'm at the point where I think I figured out to some degree, improved a way that works portfolio management works for me and I'll get back to that in a second. Just trying to figure out on the business side, how to grow it, and scale it. It's a lovely business and a lovely experience. But from a business perspective, it needs scale to work. I always thought I'd want to stay small but as I've grown a little bit and gotten better that there's no point in staying small. I mean, this is a business where if you have good ideas and can put money to work behind it, it's more fun and more interesting to do with more money.

Andrew: That is certainly true. Are you ready to return to CoreCard or did you want to talk about anything else?

Avi: No. So, I talked about identifying the right company. Again, relying on the classics, adding the two aspects that are very meaningful to me, which is management and lack of dilution. I just want to address quickly, assessing the value. Greenblatt says something along the lines of, "In this business, it's very simple. You're looking for something that you think is worth $4 trading for $1." That's that's the classic. I just look for things that are trading on a comparative EV to EV on multiple that's cheaper than its peer group or cheaper than what I think it should be worth. That's not a huge secret there. I don't tend to use a DCF because that requires forecasts out five or ten years. And often, the terminal value ends up being most of the value and that's just dumb.

I try to prioritize a sense of reasonableness. What is this reasonably worth three to five years out? What would a private buyer pay for it? Does it have a long and wide opportunity pathway such that when they stumble? Because every company stumbles, every company misses, every company has a bad quarter. Do they have the ability to get up and keep walking down that long, wide pathway? So, that'll be worth more down the road. I don't spend a lot of time trying to hone a perfect future forecasts because nobody knows the future. I don't know the future. I don't like to spend a lot of time thinking about a more precise future. I just look at the opportunity set and where the future could be. I try to weigh what could happen on the bad side. What the downside is and what the upside is? I try not to be too precise in it.

Then the aspect of it that really nobody spends enough time talking about is a framework for thinking about how to size a portfolio. This is something that's really clarified for me over the time working at Long Cast Advisors. When I started out, I felt fairly confident that I knew how to analyze a company and I knew how to take apart a company, and take apart an industry, and look at the competitors, and look at the sources, and look at the customers, and assessed that I had zero experience in portfolio management. Then, I knew that it's very different. I knew portfolio management was this thing that's very different than analysis. I knew I didn't know it. I told my early clients like, "This is something I'm going to figure out and hopefully not lose a lot of money in the process of figuring it out."

One of the reasons why I focused on small companies and also wanting to stay small is I wasn't comfortable managing large pools of money without understanding portfolio management. I think I understand it better now. I think I have my arms around it. I think doing SMAs requires a portfolio manager to hone the craft better. Because you can't just have an automatic re-weighting with new money come in as you can with the partnership. I have a method for doing it. I'm not going to go into detail on this but that doesn't cause me brain damage. I have a method for doing it. It's working for me. I think it's working for the clients. But it's really helped me hone the skill which is focused on IRRs. What is the IRR and how do I improve my portfolio so that it has, "I get rid of the low IRR names and only focus on the high IRR names."

Part of this process, my thinking, my roll vision. I'm going to just share with you. I've met a lot of great investors over the years and I've always wanted to ask them, especially years ago when I was starting out. How do you do portfolio management? I never really asked anyone this straightforward because I think there's only one answer to it and that's take your best ideas and put the most money behind it. That's portfolio management and I was afraid that anyone who gave me an answer that was different from that I would have a little bit less admiration for them because how else do you do this? You just have to take your best ideas and put the most money behind it.

That's where the appropriate sizing comes in, where you have confidence in the idea, where I have more confidence in the idea, where I have more confidence that the downside isn't going to be too dramatic. I think there's where the outcome offers enough, obviously upside to risk to weigh it. And it leaves room in the portfolio for ideas that maybe there isn't as much certainty behind it. Maybe there's not much visibility behind it. But there's room for smaller positions in the portfolio for ideas that over time, as the company's evolved and developed you can add more to it.

On portfolio management again, you have to be just as much comfortable buying on the way up, as you are buying on the way down. If it's a company you like and evaluation still offers that upside. Again, one of the other things I've learned is that if there's a company I like, in the rare instance, I'm happy to scale into a position slowly. There's nothing worse in going large into a stock that might prove to be a liquid and be wrong. That's just a terrible situation to be in.

So, watching stocks unfold over time as a small owner of it with the expectation, "I'd like to be a larger owner, but if I see things that are surprising. If management keeps changing their strategies, I want to be able to get out." This is actually a good segue, because Sam Rabatsky, may he rest in peace, who was on these early CoreCard conference calls, turned me on to this idea. That if you like an idea, buy a few shares of it. It's more fun to follow if you own a few shares. Sam was on these early conference calls for CoreCard and on a number of smaller companies. He was an older guy from Queens who was a personal investor and he is a phenomenal investor. A phenomenal investor you've never heard of.

In fact, during COVID he kept telling me to buy Gold Fields. I think the ticker is GV, which I wish I'd listened to him. I kept saying, "I didn't want part of a real estate." Gosh, was I wrong about that. But he was someone who I overlapped with on CoreCard, and he had owned it going back to... I owned it in originally at eight bucks. He owned it at under a dollar. I would talked about it and he's... You had mentioned to me before this call a little bit about reading the transcripts. You're asking me out their CEO, Leland Strange. Sam was like, "This is who he is. This is not a personality." This is really how he's been since I've owned the stock in the 90s. He's a really straight shooter. He's a phenomenal operator, and he was someone that both Sam and I were very happy to put some money behind. So, I'll use that as a segue for CoreCard, which hits on a lot of these aspects. And also has a long operating history at which to gauge and judge how well they've done. So that's a segue, I'll dig into CoreCard now.

CoreCard has its historical basis as a company called Intelisis. Intelisis was a holding company going back to the 80s. They had a portfolio of holding companies. I tracked their history going back a while and put it together. I think, generally between 5 and 8 large-named companies. As portfolio of smaller companies, you never knew their names of and it was all over the place. I think they had an airplane D I'd seen and they had chemical parts cleaners. You could track over the years what it was, including in this holding company. It was a company called Paces.

Paces was a FinTech company doing software for processing credit cards. I think in 2001-2002, they sold this Paces business to First Data. If you look through, First Data is a hold filings. You can read about the transaction and you could see them talk about the VisionPLUS software, which they acquired from Paces. It was foundational for First Data's credit card business and was underlying, what was ultimately a multi-billion dollar revenue, several hundred million EBITDA business. When they sold Paces the first day, they kept the stub of this investment. As I understand it, they basically rebuilt the company, but instead of doing it in COBOL, they did it in C++. That's basically the foundation of this company. They sell it in 01 02, they keep a stub of it, which I imagine is a few software engineers to redo the software.

Now, we jump ahead. And then, it's just a line item. It's a loss. I wouldn't even call it a loss leader because it wasn't costing that much money to keep anyway. But you go ahead and through, I think, 08 09 10, they started to wind down the holdings. By 2013, 14, 15, they only had two businesses. They had this CoreCard business and they had something called ChemFree, I think was called. Chemstar, ChemFree, which was this industrial parts watcher, which was profitable and free cash flow positive. They were allocated the free cash flow from this into the software business and Sam who had this historical perspective was like, "Back then, the shareholders were like, 'What are we doing with this software business? Let's just sell the software business and focus on industrial washers.'"

The company did exactly the opposite. They sold the industrial parts washer business to go all-in on this money-losing software business and then they did a recap. Sam told me back then, shareholders were furious. A lot of them sold their shares, he held on. They went all in on this business. So what the business is, is it's the software and I'm probably not going to do this justice. It's the software that connects the transaction to a bank and to an account within a card. It is the ledger at which all of these transactions are recorded. Other companies do this, obviously. The large players TSYS and First Data. Pfizer do this. But where CoreCard differentiate itself is complicated transactions. And again, I'm not going to do this justice. Some of the older conference calls, Leyland goes into talking about a customer who goes into a hypothetical store and one day purchases something at one interest rate. At another day purchases something at another interest rate and they're able to keep this transaction of record and these create complex, complex statements and their software is able to do it. Where simple credit cards and simple debit transactions, that's not something they're doing. They're looking for a complicated ones.

So, back in 15, spin-off, sell off of industrial parts claimer keep this and they're developing the software. This came across my radar in 17 or 18 and I started buying some and I went to a... And then the scuttlebutt is that Apple Card is likely to buy a license from the move. The CEO starts to make allusions to the possibility of a large license deal. Now, they had said they wanted to get out of license business and they only want to do processing and then a large company came along and wanted to do it. That was this sort of expectation. It turns out that was the Apple Card through Goldman Sachs. And the reason Apple was willing to use this company to do that's licensing for software is because they had a modern software system that was customizable and quick. They're not the only ones who can do this. The larger players can, it just takes more time. They're very bureaucratic. And CoreCard, the way they do their business, they spend nothing on sales and marketing. Again, I encourage you to read their older transcripts there. They're laughably funny and he's got a terrific sense of humor. But he talks about like, "Look, we're only able to take one or two customers, large customers a year. We don't want to get out of our skis, trying to do it." They're focused on growing profitably and free cash flow positive and they don't want to promise something they can't deliver.

The Apple Card provided this huge halo effect over them in addition to driving profitability and free cash flow. But where they really want to be is on the processing side. So as we take apart the company, I'll differentiate some aspects of this a little bit but I'm still just giving you the broad outlines of the history, which is the software company. They have a license for Apple Card. But some of the other customers they had in the past, Wirecard as you mentioned earlier, was a customer of theirs. Obviously, Wirecard was also a fraud and was very aggressive in some of their business.

WEX W E X, I think is the ticker, was an early customer of theirs. They started out as a gasoline cars for the trucking industry. What else? I'm spacing on some of the other names that were customers of theirs. Apple provided this halo effect when Goldman purchased, I think, it was a General Motors card from Barclays. They transitioned from TSYS to CoreCard. Now as a result of both, the Apple Card and the General Motors card, it appears on their financial statements of Goldman is 80% of their revenues. These are licensed customers. A license, as I'm sure you're aware, is essentially a sale of it in which the customer now owns the software can do with it, whatever they want, can host it on their own platform. There's a one-time payment for the sale and then recurring payments every time the number of monthly accounts reaches a new threshold.

Let me take a pause here and just think about monthly accounts from it. At my first shareholder meeting at CoreCard, it was before the Apple Card was launched and there were more shareholders of the meeting. The hypothetical question, because nobody knew the answer at the time, posed to the shareholders at the meeting was, how many average active monthly accounts would Apple have in the first year? I'm going to pose that to you, Andrew. What do you think how many active monthly accounts do you think they even have now under Apple Card?

Andrew: I do not know that but having read all the past four calls in the past 24 hours. I do know how quickly it turns out they grow. First year, 25 million?

Avi: So, people were right. I think, I wrote down 50 million. Some people wrote down 25 million. After the meeting, the CFO emailed everybody publicly available credit card data showing that at the time American Express had about 15 million active monthly accounts. What does that company? What's in your wallet?

Andrew: The Capital One.

Avi: Capital One. Capital One was the largest credit card issuer and they only have like 30 million active monthly accounts.

Andrew: That makes sense. Now, that you say it. Say, in 25 million, there's what? 360 million American citizens, probably 80 million of them are children. It does make sense.

Avi: Right. It was much lower than everybody thought. And it reset everyone's baseline expectation, which is like, "If they could get to 2 million active monthly users in a year, one or two, like that's huge." If they could get to 5 point and I don't know where they are now but I believe they are... There was a big fall off from Capital One and the major players and then lots of them down in the 0 to 5 million active monthly accounts. But I think, Apple's above that now. But again, I'm not 100% sure. But it really set expectations for what they're likely to do. Again, but I want to stress, they sold these licenses for the Apple Card and then later for the General Motors card. Even back then, they wanted to get out of the license business and wanted to do processing. What they have done is they have taken these licenses and reallocated the money to building their processing business.

So, when I think about this business in total, when I think about the valuation of the business, I really focus on the backing out the licensing revenue and focusing on the processing revenue. Now, other people who are familiar with the stock and own it say, "Well, they're going to get license revenue in the future. You can't totally back it out." It's appropriate. That makes sense. But on a valuation basis, I think the right way to value this is just the processing.

Andrew: Let me just... So you've stern so much out at it.

Avi: It's too much, I'm sorry.

Andrew: No, it is great. I just want to pause for one second. So the basics of CoreCard is they do the processing for the issuer, not the acquirer.

Avi: The do the software that enable the processing.

Andrew: The software that handles the processing. And obviously they're big. The bottom line is their big customer is Goldman Sachs who has the Apple Card and now the GM card. But I do just want to check to make sure. My understanding was, I know they get the licensing as you said every time it goes a little bit higher. They do get processing revenue from Goldman for the Apple Card as well, right?

Avi: Correct. They do get some processing revenue from Goldman, as well, for the Apple and the General Motors card.

Andrew: Okay, perfect. Just making sure.

Avi: I don't know the breakout of that, but there is some process in RAM. And there's a whole other line of business, which is professional services, which is the work done to customize the card for their customers. And again, I think from an investor's seat, do you include that in your evaluation? Do not include. The company sees it and I think appropriately so, as that's a recurring revenue, too. Because as long as you have a customer, you're going to have to be doing work for them.

Andrew: I think there's even the line in their 10K that says, "Hey, if somebody license this from us often, we have to send people to work with them to incorporate everything you're saying, basically." Just to make sure they're incorporating it correctly. So you almost get like a permanent consulting gig once you get the licensing to connect.

Avi: Correct. And so there's a recurring revenue component to the professional services aspect, as well. On top of it with this company, you also got a company with a really solid balance sheet that hasn't diluted shareholders that buys back shares when... There's only about 20 million shares outstanding and they're not buying back tons of it, but they're keeping their share account level. They don't handout oodles of stock-based compensation. Although, the CEO mentioned they may need to switch to that in order to help with retaining some of their employees and they have a long-term shareholder base. White Investments has owned this for years. Leland has owned this for years. There's not a huge float and they have a long-term dedicated shareholder base behind this, as well.

Andrew: So, let's jump the good.

Avi: I was going to start digging into the company a little bit in the financials. And by the way, they've done all this. I'm going to move the microphone a little bit. What they've spent on sales and marketing since 1Q 2019 is under $800,000. But they do all these with no sales and marketing spend, taking on one or two clients a year.

Andrew: They've got a slide in...

Avi: One of two large clients here.

Andrew: They've got a slide in their most recent investor deck that shows their marketing spend over time. It's like, the numbers are in thousands. It's $38,000 per quarter or something is what their spending. I saw it and I was like, "That doesn't make me right."

Avi: That's got to be wrong.

Andrew: Yeah. Well, I want you to have him but I do just want to jump in. As they said, I believe on the Q1 call after the news broke. I do just want to jump into the elephant in the room. 75 to 80% of the revenue is coming from Goldman and of that revenue the vast majority of it is coming from the Apple Pay Card, right? And there was, I think in the key one call...

Avi: It's not the Apple Pay Card. I think it's just the Apple Card.

Andrew: The Apple Card, yes. I think I just say because they use... Yeah, the Apple Card.

Avi: But they're two different things. Apple Pay, I think is more of a debit card and the Apple Card is a credit card.

Andrew: So when I use Apple Pay...

Avi: Apple Pay encompasses lots of things.

Andrew: Yes, Apple Pay encompass every- So what they're getting is from that card. You're 100% right. On the Q1 call, they refer to it as the Bloomberg article, right? And it's a Bloomberg article that says, "Apple is exploring. They have a project." I can't remember the project name, off the top of my head. "Apple's exploring ways to in-house everything." I think CoreCard is mentioned by name as providing processing for the card.

Avi: In the Bloomberg article, they mentioned them.

Andrew: In the Bloomberg article, CoreCard's mentioned by name. They mentioned by name, "Hey, Goldman is the issuer of the card. Maybe Apple wants to think about becoming the issuer of the card." I don't know if Apple wants to come a bank because that's basically what it would imply they do. But maybe they want to get other people. And so, I just want to turn to... This is actually really encompassing because you can talk about churn in different ways here, and all sort of stuff. But let's just talk about the elephant in the room and talk about the Apple Card and the possibility Apple cuts them out in some way, shape, or form.

Avi: One would presume that anything is possible. One could presume that you have you have revenue risk and anything is possible. But what are the reasons why it's unlikely? What part of that article was right? And what part of is wrong? And where does Apple stand to benefit? It's my understanding, the way I read the article.

Well, first of all, let's talk about the financial services industry in general, especially related to credit cards. If you look at the financial software and financial system, there all these toll takers along the road, MasterCard, Visa, the issuer. Everyone gets pennies or fractions of a pennies on a transaction. When Apple talks about wanting to in-house some of that, what I think they're talking about is they want to stop paying these transactions fees on credit cards. What I think and as I understand it, if you read the article with a different angle on just the hot news and the elephant in the room, but really like, "What's the business case for this?" As I understand it, what they're talking about, what they're looking to do is getting rid of the frictional transaction fees that go to entities and companies that Apple doesn't need anymore.

So when Apple has Credit Data on all its customers or use data on all its customers, why do they need to pay Equifax? Why do they need to pay credit rating fees? Why do they need to pay the credit companies? If that was they're called Equifax and TransDigm and the people who say, "Yes, you can have a credit card or not." They don't need that anymore. They have your data, they have all the data they want on you. They could make that assessment and that saves money on the issuance of the credit card. I think it's 25 to 30 dollars per person who signs up for a credit card, goes to those agencies. Those are the areas where I think Apple is looking to save money.

Broadly speaking again, the transaction infrastructure involves a point-of-sale device. Apple wants to get into the point-of-sale device now. If I recall reading somewhere, that they're going to be issuing or there have something to make every bone of point-of-sale devices or something like that. If I remember reading something. These are the areas where it's going. It doesn't make sense for them to cut out CoreCard, especially because they bought a license. They already own the software and their ongoing fee to CoreCard for the growth in their monthly active users is maybe a million, two million, every other year. It is not that much in the big scheme of things versus $30 for everyone who signs up for a card, that has to go for a credit check. With that, they don't need anymore because their ecosystem enables them to capture data on hundreds of millions of people already. Billions of people already.

Andrew: I do hear you on that, but if I could just push back. So, CoreCard's revenue over the past 12 months is 65 million dollars, right? They do 20 million of EBIT off of that. Goldman is 75-80% of their revenue. All of Goldman revenue is not related to the Apple Card, but the vast majority of it, so let's say.

Avi: But most of it is in the licensing and the related professional services.

Andrew: But if your Apple... Maybe it's not CoreCard, specifically. CoreCard, again if I remember correctly, was specifically called out in that Bloomberg article. But if you cut out Goldman as a whole, like you can own that relationship a lot more directly and as part of that, maybe you do want to cut out CoreCard in some way, shape, or form.

Avi: So you're throwing out large numbers, but you have to keep in mind that 1Q 22, they had roughly 13 million dollar license revenue. All of which drops to the bottom line and that was largely related to the General Motors card going live. That's not an Apple Card experience. Where is the fees that Apple's paying to CoreCard? It's in some of the professional services area, which presumably I guess they could take back some of that.

Again, another reason why I mostly focus what I value this on the processing and maintenance fees wholly, solely on the processing and maintenance fees. Not on the license, which are lumpy. And which again, it's profitable. It generates free cash flow and they're able to reinvest that profitability and free cash flow into growing their processing and maintenance fees, excluding Goldman. So, they'll be a time and place where the proportion of revenues coming from Goldman is going to shrink, as the rest of their business grows.

Some of this growth is coming from a variety of new cards and card issuance that Leland has talked about on a call with American Express, with Cardless, with Kabbage, the new Kabbage under American Express, and the American Express small business side. They've talked about opportunities. They bought Wirecard's Middle Eastern business and they're issuing new cards through Saudi Arabian banks. They're expanding in South America.

I know I'm talking about a lot of things at once here, but what you've seen in the financials is some margin compression as they've invested resources ahead of do, and let me stress, X Goldman growth. They're reallocating this capital and the profitability of free cash flow. They're generating through the sale of these licenses largely to Goldman into X Goldman growth. The things we're talking about today, which I don't think are that as much of a risk is the headlines would like you to believe. That should also alleviate over time as the business outside of that area grows. Does that makes sense to you?

Andrew: It makes soul sense. Again, you follow this company for five years or longer. I followed this company. I heard you mention them a month or so ago. I've done 48 hours research on you. But the two things that worry me here are just the Apple concentration. You see that and...

Avi: The Apple concentration and including the Bloomberg article take a lot of head space from some people. But again, as you reasonably think through, where is Apple going to get the biggest bang for the buck? Where do they actually want to be in this business? I think it speaks to getting rid of the pennies they have to spend, needlessly. If they did want to build a better transaction process software why would they just buy CoreCard? To me, it just doesn't make a lot of sense for me from a business case.

Andrew: I was going to ask two other questions before there, but I'll guess I'll just jump that. So, if you're a shareholder, the biggest negative is exactly what you said. Apple leaves [inaudible], whatever. Maybe not the biggest positive, but a huge positive is about a month ago, a Wall Street Journal article comes out that says, "Hey, Goldman," who's obviously 80% of the revenue is thinking about how do we dive into this business further? And I know for a fact it specifically mentions Goldman has been talking about just buying CoreCard.

I just want to ask your thoughts on that. It's an interesting way to think about Goldman has this buy-versus-build decision. How many software engineers do we need to buy to go and recreate this whole thing ourselves or buy a competitor and yank CoreCard out in some way, shape, or form? And I think that's interesting to talk about from the acquisition angle because it also shows CoreCard has said, "Hey, we've had churned before, but we've never had voluntary churn. We've had churned when companies like Wirecard have gone out of business. We've never had a company whose left us for a competitor voluntarily or who's in-house." So I think it's really interesting to think about that with Goldman, thinking about buying them and being 70 or 80% of their revenue.

Avi: As a portfolio manager, the problem I deal with is how do I allocate capital. So as a shareholder, would I like them to sell for a high multiple someday? No. The difficulty that I face would be reallocating this to an idea that's just as good. I'd like them to remain independent and continue to grow, because I think the growth opportunity is still tremendous. But there is a case for them to sell and I don't think it's going to happen though until they reached at least 100 million in revenues, which might not be that far down the road to begin with. I want to add just because I have followed this for a while. I was in 2018 I think, I was at a gathering with a bunch of hedge fund managers. So people were pitching and I sat through a pitch for a company called Carvana. People were really eating it up.

Andrew: That's a dangerous thing to drop these days.

Avi: Well, right. The people were eating it up and I wasn't familiar with the company. I focus on smaller companies and I looked it in and I saw that they were burning 3 billion and had burned 3 billion free cash flow over the prior few years. I get what they're talking about. But I was like, "Gosh, if people really like Carvana, people are really gonna love this because they're similar dynamic. It's a platform business. As they grow, they generate more customers more revenues except they're doing this on their own dime. They're doing it without diluting shareholders. They're doing it on a free cash flow positive way." And it was just like nobody cared. I couldn't understand it. That's kind of the world I inhabit, I guess. Nobody's interested in the stocks I am in. As an investor, that's not a terrible place to be.

But when I think about this company because you threw out a number. So let's talk about this. On a trailing 12 month basis, this company has traded at 8 times the 27 bucks. The company's traded 8x EBITDA because they have 25 million and trailing EBITDA. I tell people it's not as cheap like that. I don't think it's appropriate to look at it that way because I think it's important to back out the light the EBITDA associated with the licensing. And again, this is a much more conservative way of looking at it and like I said, other shareholder alike you can't back out all of it because they're going to get licensing revenue in the future. And the truth is they will. But let's just take a most conservative look at it, which is for the purpose of investing, why not? You have to be able to hold multiple ideas in your head at the same time. So if you'd back that out, there doing about 12 million in trailing EBITDA. So, this is traded at 17 times trailing EBITDA X licenses, which I would argue is not an unfair multiple for a company that's growing plus 20-30% a year, top on. That is profitable and free cash flow positive. Furthermore, as they grow you could look at it and say, "Well margins have compressed." Well, the reason is margins are down. For a number of reasons margins are down. Employee costs have gone up. They've grown their head count. Part of what they're doing is they're growing their head count ahead of new launches.

What really sort of triggered my excitement was on the last conference call. When the last conference call, the CEO said, "Next year at this time, we will be in a position to take on two large clients at the same time." And that was really important to me. Because this year, again, let's just talk big numbers and headline numbers, total revenue, year-to-date is 53 million, 54 million dollars. Let's see, 15 of that is license. So that's 15. And again, I don't look at license as a recurring revenue, so next year's 1Q revenues are going to be tremendously down here over a year, even as going to be tremendously down every year. You're going to look at this print and everyone's go, "Oh, my God. It's not growing anymore." But that's clues they have 13 million in license revenue that isn't going to recur. So I've just been fairly cautious about what the next year's first half looks like versus this year's first half. You're going to have a down year. I don't know how the markets going to respond. I think you could say, "Well, it's going to sell off and maybe there's another buying opportunity. I don't know.

But when the CEO said that next year, this time, they'll be in a position to take on two whale clients at once. I think it speaks to both why margins are down because they're building the capacity to take on two whale clients next year. The likelihood is they're going to have them and now you're looking at to 2024. I don't think next year they're going to top this year's revenues but in 2024 if they are. Now, you're starting to see a whole other aspect of the business unfolding, growing, reaching new revenues, getting closer to 100 million in revenue. You know what? I pitched this on The Manual of Ideas in 2019. I don't know if the presentation is still available, I can send you one. Just my broad thinking about it was like, "If you think this is going to get to 100 million in revenue someday, you don't need to sharpen your pencil and look at the forecast, some evaluation. I think if this is 100 million dollar revenue business with 25-30% EBITDA margins, you can slap a multiple on it. I think it's going to be worth more than 250 million in market value and it's still growing. There's still an optionality, an opportunity for continued growth and it's well managed.

In my last letter to my investor, maybe it was in the 2Q letter. I wrote about this a little bit substantively. And Leland, the CEO says, "It's all the same. It's like we're not the only ones who do this." Marketa can do it again. The larger companies can do it. It just takes them longer and it's a little more cumbersome. There's a lot of fintech companies do it but what CoreCard does from an investor perspective, unlike say Marketa is, they're doing this profitably and free cash flow positive. You're not getting diluted and it gets back to...

When I was on the sell-side, a client called me to talk about a company. At the time, there was nothing really tremendous happening in the news flow of the company. It was a company called M-CORE, which is a terrific company. A mechanical and electrical specialty services. There wasn't anything in particular and that was sort of like, "I don't see what's on the horizon and the portal image [inaudible]. But I could buy this today and I never have to think about it again." To me, it was like, "Oh, my God. Of course, the problem you're dealing with is allocating capital and if this solves the problem for you, you'll get higher returns over time and you don't have to think about it." That's still in Holy Grail.

Andrew: Oh, thank God. I can tell you I've allocated stuff to worst that I've certainly had to think about. Let me ask you a few just lingering questions I've got here. First, they frequently said and you started talking about, you did talk about how I've got Marketa's last 8K and everything's pulled up over here. So, how Marketa's doing this? The last. But CoreCard frequently says, "Hey, we sell a premium product at a premium price." They even said it was either on the Q2 or Q3 call. We know we've got a potential customer who's listening to us and we're saying, "Hey, we're just getting open capacity." And they're wondering why didn't you take us? And the answer to them is we didn't take you because you asked us to be the low-cost provider. You didn't want a premium product. You wanted it and that's just not us.

So I just want to ask you, as an outsider who hasn't followed this for years. What makes their processing for the issuer premium versus... You talked about how the server whatever has something that be a little clunkier. But what makes them premium? What makes them Apple, who we know love's premium, customizable stuff and says, "I want to go with them when I'm launching from the ground. I'm starting from first principles. They've got the best thing. I want to license them." Why are these guys the premium product?

Avi: My understanding is that their software... I'm not a software engineer, but my understanding is that they're able to handle complicated credit transactions. I'll try to find exactly the transcript it was. What he talked about pro-bass fishing. That was an example they gave her.

Andrew: That must have been known. I would love to see that transcript at some point.

Avi: He just talked about this hypothetical customer where you have these complicated transactions that are not straightforward. Where you have maybe a single product that has a low interest rate early on and a higher interest rate later on a single product. Maybe they're buying a boat along with a fishing rod and how their software is able to deal with that. And a lot of other companies have a lot of hard time with that. And that's why they're able to have a premium product.

As Leland has talked in prior calls he's like, "If you don't know who we are, you're not the right customer for us. And if you know who we are, you know where to find us. And when we're available, we'll be able to work with you." He did mention that on the call he says, "If you're one of the customers who's listening to the same well, we have a hole and we're waiting to fill it with a new customer and you're wondering why it's not you. Well, because we want to do complicated transactions." I think the inference I heard as well on that was, "If we can only take on one or two whale customers a year, we want them to be customers that everyone's familiar with. We want them. We want them to be the Apple Card for the next Apple Card, or the next large high-profile." Because they benefit from the halo effect from it. And arguably, I guess you could say, is whatever discount or whatever expense you have waiting for that, that's your marketing spend. Their marketing spend is definitely understated. It just doesn't show up on the marketing line. It shows up elsewhere and I guess that's where it shows up.

Andrew: The big banks like, Chase or Bank of America, you mentioned Capital One, who do they probably process with for? I'm sure you don't know the specific partnership but who probably...

Avi: Probably, TSYS, First Data, Pfizer.

Andrew: Okay. So it is those guys. None of them are in-house or anything?

Avi: American Express has always done it in-house but these are not... The credit card business has been around for a long time. The use cases for the software has been around for a long time. The software that underlies, this has been around for a long time. And one thing, by the way, they're also doing. He's talked about this on the calls. They've already started to rewrite this entire code in Java to update it for the next programming language.

Andrew: AMX is interesting. I don't think we have full time to talk about it but there was something on one of the past couple calls where they were like...

Avi: They talked about Cardless. American Express is opening up its network. Again, I'm not privy to who the next big customer is. Thankfully, I don't want to be but they have talked about these opportunities to sign two whale clients at this time next year. It is a business where everyone's trying to sell something. CEOs are always talking their book. But I follow this company for a long time, their CEO has always been a straight shooter and who knows if they're going to win. He doesn't know the future any better than you or I do and anything is possible. If they are in a position to sign two whale customers late next year, then 2024 starts to look a lot better than this year. Now you see just how they're able to generate free cash flow and reallocate it to high growth opportunities. And why I think this belongs in every small-cap portfolio, if you could only have shares for it.

Andrew: That's how I meant to start the thing out. You said, "I just loved the pitch." You used the last time, I heard you talk about it, where is it? This is a company that belongs in every small-cap portfolio, whether it's a growth portfolio or a value portfolio. One last thing, you mentioned the CEO. I told you before the call, I really enjoyed hearing in my, I do think he's a straight shooter. In Q2 he said, "Hey look, we had some Wirecard revenue in 2021. We obviously lost it because Wirecard was a house of cards so you guys can back out of your growth models if you want. But the fact is we lost it. So we don't back that out. But I do just want to mention because I also think it speaks to this, share repurchases. So, the stock is down a decent bit over the past year, partly due to the Apple rumors, partly due to everything. Growth is down. But, I want to talk about share repurchase and how the company approaches that because I think it's really interesting, as well.

Avi: I wish I could tell you some scientific method that they talk about share repurchases. My understanding is, when the CEO thinks the stock is cheap, they buy back shares.

Andrew: That is exactly it but I think it's refreshing and I think it's nice. I can't remember what call it was, but you said, "Look, when we're going to buy back shares like we are long term conservative shareholders, when we see value in the shares, we're going to try to buy back the shares at that time frame." Recently, they've been buying back shares at a decently nice clip. If you're a long-term shareholder and you see this straight shooter CEO who's coming on say, "We're going to buy shares when we think there's long-term value there that we don't know the future 100%. But when we think there's good risk reward we'll do it." It's nice to see them buying back shares right now.

Avi: Andrew, when I was doing my due diligence on this company back when I was really digging in and earlier on Parker Petit from My Medics used to be on the board. There was a short report, I think Spruce Capital wrote an idiotic short report on this. Re-hash it...

Andrew: On CoreCard, I didn't realize that.

Avi: On CoreCard. It was wonderful because there's nothing new in it at the time. You love it when a short report comes out and there's nothing new in it. It's all known information because that means they couldn't find anything and great. It really further validates the thesis. But I spoke to a former high-level executive at the company to just better understand what was going on there. This is a small company. We have this very funny conversation and this person. First of all, she's like, "It's not fraud. This company is not a fraud." Parker's on the board because he has a long-term relationship through Georgia Tech. This executive said something very funny. They said, "George Leland, but gosh, he would say things like, 'Solve no problem before its time.' Things would pop up and he's, 'Solve no problem before assignment.'" This person was like, "It included like we had a bad coffee maker and I wanted to replace the coffee maker and he would say, 'It's not broken yet.'" And this person said, "I think that's his thinking behind why Parker Petit's on the board. His term is going to be up in a year. He's probably going to wait a year before his term is up to deal with it because he doesn't want to create this issue." I've talked about before with Leland and it really is his [inaudible]. Look, this isn't his first rodeo. He's been doing this a long time and I'm pretty sure that optics don't matter to him as much as just operate a business that is profitable and free cash flow positive and growing, and able to satisfy the customer, and able to satisfy the employees, and able to satisfy shareholder. When you have an opportunity like that to own shares in a company managed, that's not just looking at one aspect of it, but the whole part of the company, its customer chain, its employee chain, shareholders. I don't see why you wouldn't want to own that.

Andrew: This is a small thing, but one thing that jumped out to me, when I was reading it is the earnings calls. The CFO comes on first, and goes pretty quickly through the numbers and what's happening in the call. And then Leland comes on and quickly says, "Hey, here's the big thing, kind of, I'm thinking about from Atlanta," where I think he's based. "But here's the big thing I'm thinking of." And then, they go to questions. But like, I don't know any other company where the CFO's the first to speak every time. Like, normally, the CEO. He's the CEO, he's the Chairman, he's the President. No, he comes on and says first. Maybe, I'm just having the wool pulled over my eyes or something, but it seems like somebody who doesn't have an ego just letting the CFO go first. That is the smallest thing I've ever seen. But when you said it, I'm really tickled by the CEO just having read the past four or five calls. I will say that. We have gone over an hour and I do have some [inaudible] to get to.

Avi: I can't believe how quickly an hour went, Andrew. I did not expect to go this fast, but I'm sure all your guests say that.

Andrew: All of them do. Sometimes I'll have a cast and they'll be like, "Look, I don't know if I can talk about a company for an hour." And I would say, "I promise you, you will be very surprised. Maybe it would only be 45 minutes, but you will be very surprised. You'll feel like we have just said this trades at 15 times price to earnings and the thing will be over." I do want to give you a chance. I actually had a lot of other notes to talk about, but do you think we got the majority things but anything you think we should have hit a little harder that we kind of glance over or anything you think we miss that you wish we had talked about during this podcast?

Avi: I've talked a lot about how I look at this on a processing basis and you should really look in 1Q 19, they had 1.8 million in quarterly processing revenues. They're now doing 5.3 million. And I think we're just starting to hit a growth curve on it and if you play out where this is. On a processing only basis, and again, you can't back out profitability on processing only. But on processing only, this is traded at under 10 times sales. Just processing and maintenance revenues. Now, I don't generally buy companies that are unprofitable and then slap a sales multiple on it. But my understanding is that 10 times sales trailing recurring revenue is not a crazy multiple. Just on that alone is not a crazy multiple on that alone.

Andrew: That might be 2021 Avi speaking, not [inaudible].

Avi: So I don't know, but that just the processing. It doesn't include the professional services, the licensing, or any other aspect of the revenue.

Andrew: You did mention 2019 [inaudible]. Post-COVID, I will just say like, "I pull out my physical credit card and use it a lot less than if you've got an Apple, the phone, it's the double tap on the right and you touch. Just obviously that COVID growth pump has already happened, but I do think people have had that physical double tap and tap, just ingrained in them post-COVID. You've probably locked in a much larger user base, as more people go to Apple, Apple cards or any type of thing. I do think you've got more of that. That's pretty interesting from a growth perspective, as well. Cool. Well, Avi this has been absolutely great. Look, I know you do great work on micro-caps. I know we've got one or two other in common that actually might be too small for this podcast that were mentioned. But I really appreciate you coming on, and I'm looking forward to having you on again in the near future.

Avi: There's more information about my firm at longcastadvisors.com. I appreciate you having me on. Happy to chat again. Obviously, any time at your convenience. Love spending time with you.

Andrew: I appreciate it. And look everybody there's going to be link to Avi's Twitter profile in the links and show notes. So please just go, click on him and you can probably slide into his DMs or find out more about Long Cast and everything through that. All right. Avi Fisher, thanks so much, man.

Avi: Thanks, Andrew. See you next time.

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