Executive Summary
CoreCard Corp. (NYSE:CCRD) is a leading provider of program management and processing software and services for credit, debit, prepaid cards, BNPL, loyalty programs, and consumer finance products. The company serves a diverse customer base and generates revenue through professional services, processing and maintenance fees, license fees, and third-party program-related services. While CCRD’s largest customer, Goldman Sachs, represents a significant portion of its revenue, the company’s successful partnership with premium brands like Apple Card and plans for diversification indicate its quality offerings and growth potential.
Business Overview
CoreCard Corp., formerly known as Intelligent Systems Corp. (INS), operates as a leading program management and processing software and services provider in the financial industry. The company specializes in offering comprehensive solutions for credit, debit, prepaid cards, buy-now-pay-later (BNPL) programs, loyalty programs, and various consumer finance products such as loans, accounts receivable management, and collections/recovery.
CCRD’s core mission is to empower its diverse range of customers, including financial institutions, program managers, accounts receivable businesses, retailers, and processors, with the tools and technologies to effectively manage and process their transactions. The company’s robust software solutions enable customers to maintain account data, record payments, assess fees, resolve disputes, manage collections, and settle transactions with institutions and network associations.
The revenue streams for CCRD encompass various aspects of its operations. Professional services form a significant part of the revenue, with fees charged to customers for periodic modifications and enhancements to the software based on their specific operational requirements and strategies. Additionally, CCRD generates revenue through processing and maintenance services, which include implementation and setup fees, along with recurring monthly service fees based on the number of accounts managed. License fees also contribute to the revenue, where customers are charged recurring fees based on the number of seats, customer accounts, and software modules licensed. Furthermore, CCRD provides third-party program-related services such as monthly statements and card production, adding to its revenue streams.
The company’s success and growth can be attributed to its ability to adapt to evolving market trends and meet the changing needs of its customers. CCRD has capitalized on the increasing demand for digital financial services, driven by the rise of e-commerce, fintech innovations, and changing consumer preferences. By leveraging its expertise in program management and processing, CCRD has positioned itself as a trusted partner for prestigious brands and financial institutions.
One notable achievement that highlights CCRD’s market standing is its partnership with Goldman Sachs for the Apple Card program. The selection of CCRD by such renowned brands demonstrates the quality and scalability of its offerings. The Apple Card launch, considered one of the most successful card launches in the United States, further attests to CCRD’s ability to deliver exceptional processing and program software solutions.
In the first quarter of 2023, CCRD witnessed substantial top-line growth, primarily driven by a remarkable 27% increase in professional services revenue and an impressive 34% growth in processing and maintenance revenue. It is worth noting that no new license tiers were achieved during this period, resulting in no license revenue recognition. However, this is in line with expectations and reflects the completion of a significant license revenue milestone in the first quarter of the previous year, attributed to a large conversion.
The company’s ongoing investments in its platform and processing capabilities are yielding encouraging results, as evidenced by the steady onboarding of new customers who value the advanced features and functionality offered by the CoreCard platform. This positive momentum has prompted CCRD to reaffirm its 2023 services revenue growth expectations of approximately 10% and anticipate total license revenue within the range of $3 million to $7 million.
Moat
CCRD possesses a strong competitive moat that provides it with a distinct advantage in the market. This moat is primarily built on two key factors: the quality and scalability of its offerings, and the strategic relationships it has established with prominent industry players.
Firstly, CCRD’s software solutions are renowned for their high quality, complexity, and flexibility. The company has developed advanced program management and processing software that can handle the intricacies of credit, debit, prepaid cards, BNPL, loyalty programs, and consumer finance products. Its software enables efficient account data management, payment processing, fee assessment, dispute resolution, collections management, and transaction settlement. CCRD’s software is not only sophisticated but also highly adaptable, allowing customers to tailor it to their specific operational requirements. This level of complexity and customization creates a significant barrier to entry for potential competitors. Replicating CCRD’s capabilities, even for well-capitalized entities, would be a time-consuming and challenging endeavor.
Secondly, CCRD has strategically aligned itself with renowned industry leaders, showcasing the trust and confidence these players have in the company’s offerings. The selection of CCRD as the processing and program software provider for prestigious brands like Apple Card demonstrates the reliability and scalability of its solutions. The successful launch of Apple Card, widely regarded as one of the most successful credit card launches in the United States, further strengthens CCRD’s reputation in the industry. By associating itself with such prominent brands, CCRD establishes itself as a vendor of choice and enhances its market position. This creates a virtuous cycle, as other potential customers are more likely to consider CCRD for their program management and processing needs based on the company’s track record and relationships.
Furthermore, CCRD’s successful partnership with Goldman Sachs, its largest customer, is an additional moat. Despite concerns about customer concentration, CCRD’s ongoing relationship with Goldman Sachs signals the quality and reliability of its services. The fact that Goldman Sachs has not pursued in-house processing tech and continues to rely on CCRD’s software underscores the value and expertise that CCRD brings to the table. This relationship also provides a level of stickiness, as the integration and complexity of CCRD’s software make it challenging for Goldman Sachs to switch providers without significant disruption and costs. The combination of CCRD’s technology, scalability, and strong customer relationships forms a formidable moat that positions the company ahead of its competitors.
Overall, CCRD’s moat, built on the quality and scalability of its offerings and its strategic relationships with industry leaders, establishes a solid foundation for sustained growth and market dominance. The complexity of its software, coupled with successful partnerships and customer trust, creates significant barriers to entry for competitors and strengthens CCRD’s position as a leading program management and processing software provider.
Valuation
CoreCard Corp. (CCRD) has been a subject of debate among investors when it comes to its valuation. Some perceive it as a lower-tech business process outsourcing [BPO] company, while others recognize its potential as a premium card processor and fintech player. In order to ascertain the true worth of CCRD, a comprehensive analysis of its financial profile and industry dynamics is warranted.
When examining CCRD’s financial performance, it becomes evident that its revenue compound annual growth rate [CAGR] of nearly 40%, gross margins in the mid-50% range, and adjusted EBITDA margins in the high-30% range position the company as a high-growth player with healthy profitability. These metrics alone signal that CCRD deserves a valuation on par with other premium card processors and fintech firms.
Despite the impressive financials, the market has assigned CCRD a modest valuation, with a 2023 estimated adjusted EBITDA multiple of 7.3x. This represents a significant discount to the company’s intrinsic value and potentially an overstated assessment. It is worth noting that Wall Street has consistently failed to factor in incremental business and has inaccurately predicted the maturation of Apple Card growth, leading to positive revenue surprises in 11 out of the past 13 quarters. This track record suggests that CCRD’s forward multiple could be even lower, potentially in the low-6x range, further deepening the discount to its true worth.
To provide a clearer perspective on CCRD’s valuation, it is essential to consider the industry landscape. While it may not reach the historically high multiples earned by large-cap payments companies like Global Payments (GPN), a more favorable macro environment could eventually facilitate a low-to-mid-teens multiple for CCRD. Additionally, the prevailing multiple of 7.3x is depressed compared to historical levels, suggesting that there is room for a re-rate in the future.
Investors should also take into account CCRD’s sustained, compounding growth in cash flows, which adds to the attractiveness of the investment. With a reasonable re-rate, it is foreseeable that CCRD could reach the low-$40+/share range, representing a mid-40%+ premium to its current value.
In conclusion, the current market valuation of CoreCard Corp. fails to fully capture the company’s financial strength, growth potential, and market positioning. With its robust financial profile, impressive customer wins, and successful partnerships, CCRD is poised for further expansion and diversification. As investors gain a deeper understanding of the company’s unique advantages and growth prospects, a more favorable valuation is likely to emerge, offering an opportunity for significant upside potential.
Risks
Investors should be aware of the concentration risk associated with CCRD’s largest customer, Goldman Sachs, which represents a significant portion of its revenue. Any negative developments or a potential loss of this customer could impact the company’s financials. Additionally, competitive pressures from other software and service providers in the industry may affect CCRD’s market share and profitability. Changes in market dynamics, regulatory environment, or technological advancements could also pose risks to the company’s operations and growth. Investors should carefully consider these factors when evaluating their investment in CCRD.
Conclusion
CCRD’s position in the market as a leading program management and processing software provider, along with its successful partnerships and plans for diversification, indicate a promising future. Despite the concentration of revenue from its largest customer, CCRD’s ongoing relationship with Goldman Sachs and the difficulty of replicating its software support the defensibility of its position. The company’s financial performance and growth potential justify a valuation that surpasses the current multiple. As CCRD executes its expansion strategy and secures new customers, it is positioned for sustained growth and potential stock price appreciation.
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