Yet Another Value Podcast - Avi Fisher from Long Cast Advisors on CoreCard $CCRD

Episode Date: December 12, 2022

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.   Chapters:  0:00 Intro  3:30 Avi's framework for evaluating stocks  22:45 How Avi found CCRD  24:35 CCRD's background  32:00 Discussing the GS relationship and concentration  36:50 CCRD's different revenue lines  40:50 Discussing the "Elephant in the room" (BB article on Apple trying to in house)  50:00 Could GS buy CCRD?  52:45 CCRD's valuation  59:00 What makes CCRD's product "premium"?  1:05:00 CCRD's approach to share repurchases  1:06:15 A little more on CCRD's management and history  1:10:30 Avi's closing thoughts

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Visible Alpha extracts data from every line item across sell-side models so professional investors can save time and better understand analysts' expectations on metrics beyond just revenue and earnings. Join our rapidly growing by-side client base and streamline your investment research workflow so you can focus on generating new investment ideas. Listeners are invited to try Visible Alpha for free by visiting Visible Alpha dot com slash value. That's visible alpha.com slash value. Hello, and welcome to yet another value podcast. I'm your host, Andrew Walker. If you like

this podcast, would mean a lot if you could rate, follow, subscribe, review it wherever you're watching, you're 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 Longcast advisors. Avi, how's it going? Great. Thanks for having me, Andrew. Really appreciate it. Thanks for coming on. I really appreciate it as well. Let me start this podcast the way to 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 microcaps come with a little bit of extra risk. So please do your own work. Consult a financial advisor. This isn't. investing our financial advice. And then the second way I started every podcast with a pitch for you, my guest, you know, 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 and you and I are both

interested in a company that makes surgical screws. And you were just pinging him on, hey, what type of surgical school screws did you? What type of driver did you use? And you were just pinging him on and on. And eventually the surgeon was like, is this man like trying to steal intellectual trade property secrets and i was just thinking to myself any man who would take his wife's surgery has an opportunity to do a little extra due diligence extra customer due diligence on a company is the type of man i'd love to have on the podcast but uh anyway the i didn't push her i didn't hop her over if you cause the if you cause the surgery that's a different type of man but the company we're going to talk about today is core card the ticker despite my earlier mishaps on twitter the

The ticker here is CCRD. I'll just remind everyone, $250 million mark cap, so please be careful of the size and liquidity. But I'll turn it over to you, Avi, how did you find them? And what's the story kind of with CoreCard? Yeah, happy to talk about it, Andrew. And first of all, thanks for having me on. Really appreciate the time.

I've 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. And I'd be keen to hear how it matches with your framework for evaluating stocks as well, because I think that I think CoreCard fits right into that framework so well that it's an opportunity to start at this broad level and then drill down to CoreCard. sort of the three aspects of kind of identifying stocks is the is identifying the right idea trying to value that idea and then understanding the right sort of appropriate size to add it to the portfolio and I think in order there's a lot of literature around identifying the right

idea, right? I have a library of books behind me. I've read Lynch, Buffett, 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, you know, how to value 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. One of the things, too, a few of the things that I do add onto it. I'm not

because 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, and 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 that people don't tend to change their behavior very much. And if you can just sort of assess their behaviors around decision

making, around who they hire, around their strategies, those tend to repeat themselves. So it's really important in my, the way I assess a company is to first try to assess management and pull on some of the tools I used 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, you know, in a rye terms, how the cost of dilution for a successful company down the road is like the compounded cost of it. And I want my managers to understand that.

And if they're believing themselves and believe five, 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 financing is that cost today. And I really like to look for companies that are really careful with their share count. Just on the share count, I mean, I agree with what you said on management quality. And it's very tough because, you know, we're learning this year some of the managers that people were just worshipping 12, 18 months ago. You know, maybe they were just really riding a bull market. And I don't mean that in terms of portfolio manager, though, maybe that too. but a lot of the managers who, when everything was going for 20 times EV to sales, they seemed great.

They're turned around. But on the share count thing in particular, anyone who's listened to this podcast for a long time knows, the most common question I ask is, why aren't they buying back shares if the stock's so cheap? And, you know, 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 owners overall. So anyway, completely with you on that piece. So, I mean, I think those two factors, again, in addition to, right, 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.

You know, and you also focus a lot on microcaps and anything under $500 million, really, it sounds, 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. Like management's almost entrenched themselves just on the size of the company. So if you don't trust them, if you don't trust them to maximize per share value, if you don't trust them to maximize minority shareholder value. Like I have seen $70 million companies that were probably worth $300 million to a third party,

but the management team just kept managing to suck all of that value out for themselves. So it really does, it even matters more in terms of when you're dealing with these smaller companies. Yeah. And I've learned in my seven years at Longcast Advisors, 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 retrospected, 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. And what I've learned in my seven years doing it is if you're a management team, and this is my view, some people are very successful, good, want to spend their time on activists. 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 i just walk away

i don't have the i don't have the bandwidth um i don't have the time it's not worth the frustration there are better ways to allocate money um again another aspect that i'll touch on this later is you know the importance of IRR. And I just think there's a better IRA usually finding better ideas that it is fighting a 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 Erickson, I understand it, does an amazing job in the microchap space, waging activist campaigns, among other people. I think Jeff Graham is, done it before, again, incredible outcomes. It's not my cup of tea. It's not my ball of wax.

I think you mentioned you wanted to talk about a little bit about Longcast overall as well. Yeah, I'd love to. I mean, I started, I started Longcast Advisors in November 2015, so seven years ago. I'd spent about a dozen years on the sell side. I mean, after working as a reporter, you know, after working as a writer, fell in love with investors. This funny story, but it's a little too long, so I won't share it right now. Remind me to tell it to you some other time. But you wanted to transition to investing, and a lot of people said get an MBA and call me. And it's like I just 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. 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 of 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 by side. And I met a few people and I've really not much of a dame dropper. I apologize in advance. But I met this young kid named Josh Tarasov, who's not just a young kid anymore, but a very successful fund manager. But he was introduced to me through a mutual bend, him and another person whose name I forget, both of whom had started with two million at the time. I think Josh had grown his two million to something like 20 million back then and the other guy. And he said, he was really, he still is a very kind person. And, oh, you don't need experience on the by side. You trust me, you don't need it. Just,

just start your own. And then I met the other guy, and he'd growed his two million to one million. And he said, you don't need experience on the by side. Start your own. It's the best, it's the best job out there. And it really, it, I could, I never got there. I ended up getting a job on the by side, and the first day there is what 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, you know, 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, you know, the light went on in my head. It's like, I'll never understand what pressure this person faced to lead to a portfolio that looks like this until I'm managing outside money.

And otherwise, I'm just an analyst on the other side of the desk and whether I'm on the buy side or sell side. It's really not that difference. So I realize this was the way to move my career forward. You know, seven years in, still running your own business in what, Everfield, it's incredible experience, lots to learn. Every day, 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. I mean, there's great investors who aren't managing large pools of money. There are people managing large pools of money who are 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. And 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, 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. That is certainly true.

Are you ready to turn to Corkhard or did you want to talk about anything else? No, so I've talked about identifying the right company, again, relying on the classics, adding the two aspects that are very meaning. to me, which is management and lack of dilution. I just want to address quickly assessing the value. You know, Greenblatt says something along the lines of, right, in this business is very simple, you're looking for something that you think is worth $4 trading for $1. You know, that's the classic.

I just look for things that are trading on a comparative EV to that on multiple that's cheaper than it's peer group or cheaper than what I think it should be worth. I mean, 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. And I try to prioritize a sense of reasonableness. What is a is 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, to hone a perfect future forecast 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 sort of look at the opportunity set and where the future could be. It's, you know, it's in, and 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. And then the aspect of it that really nobody spends enough time talking about is a framework for thinking about how to size a portfolio. And this is something that's really clarified for me over the time working at Longcast 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 a part of the industry and look at the competitors and look at the sources

and look at the customers and assess that. I had zero experience in portfolio management. And I knew that it was very different. I knew portfolio management was this thing that's very different than analysis. I knew I didn't know it. And I told my early clients, like this is something I'm going to figure out

and I'm going to hopefully not lose a lot of money in the process of figuring it out. And one of the reasons why I focused on small companies and also wanting to stay small as 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-waiting with new money come in as you can with a partnership. Yep. And 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, which is, you know, focused on IRRs, right? What is the IRR and how do I get, how do I improve my portfolio so that it has, I get rid of the low by our names and only focus on the higher our names. And part of this process, my thinking of my role vision, I'm going to just share with you.

Like, 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? And 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. Like, I mean, 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? I mean, you just have to take your best ideas and put the most money behind it. And that's where, you know, the appropriate sizing comes in, where you have confidence in the idea where I have more confidence, 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 they're not,

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 companies evolve and develop, 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 the valuation still offers that upside. And 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. I don't, there's nothing worse than going large into a stock that might prove to be illiquid and be wrong. I mean, 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.

And this is actually a good segue because Sam Robotsky, may he rest in peace, who was on these early. core card conference calls turned me on to this idea that if you like an idea you know buy a few shares of it it's much it's more fun to follow if you own a few shares sam was on these early conference calls for core card and on a number of smaller companies he's was an older guy from queens who was a personal investor and he had he had a phenomenal investor what a phenomenal investor you've never heard of. Back 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 a Florida real estate, but gosh, was I wrong about that? But he was someone who I overlapped with on Core Card, and he had

owned it going back to, you know, I owned it it originally at eight bucks. He owned it under a dollar. And I would talk about it. He's, you know, is this, you would mention to me before this call a little bit about reading the transcripts and you, you're asking about their CEO, Leland Strange. And, you know, Sam was like, this is who he is. He's, this is, this is not a, this is not a personality. This is really how he's been since I've owned this stock in the 90s. And 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 IntelSys. Yep. And IntelSys was a holding company going back to the 80s. And they had a portfolio of holding companies. You know, I tracked their history going back a while and put it together. I think generally between five and eight large-named companies and a portfolio of smaller companies, you never kind of knew their company.

names of. And it was all over the place. I think they had an airplane de-icing, and they had chemical parts cleaners. And over the years, and you could track over the years that it, what it was, including in this holding company, was a company called PASIS. And PAS was a fintech company doing software for processing credit cards. I think in 2001, 2002, they sold this PASIS business to First Data. And if you look through First Data as old filings, you could see, first, you could read about the transaction, and you could see them talk about the Vision Plus software, which they acquired from PAS.

And it was foundational for First Data's credit card business and was underlying what was ultimately a multi-billion dollar revenue, several hundred million EB-Dub business. When they sold PASIS to First Data, they kind of kept a stub of this investment. And as I understand it, they basically rebuilt the company, but instead of doing it in Cobalt, they did it in C++. And that's basically the foundation of this company. It was, you know, so 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 sort of a line item. It's a loss. I wouldn't even call it a lost leader because it wasn't costing that much money to keep anyway. Yep. But you go ahead and through I think like 08, 09, 10, they started to wind down the holdings. And by 2013, 14, 15, they only had two businesses. They had this core card business. And they had something called Kemp free, I think was called Kempstar, Kempfrey. which was this industrial parts watcher, which was profitable and free cash flow positive. And 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 the software business? Like, let's just sell the software business and focus on industrial washers. And 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. And 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, but it's a software

that connects a transaction to a bank and to an account within a card. It is the ledger at which all of these transactions are recorded. And other companies do this, obviously. The large players, TIS and First Data, FISA, they all do this. But where CoreCard sort of differentiates itself as complicated transactions. And again, I'm not going to do this justice.

some of the older conference calls Leland goes into talking about a customer who goes into a hypothetical store and one day purchases something at one interest rate, and another day purchases something at another interest rate, and they're able to keep this transaction of record, and these create complex statements and their software is able to do it, where simple credit cards and simple debit. transactions, it's not something they're doing. They're looking for a complicated ones. So back in 15, spin-off, sell-off, industrial parts cleaner, keep this, and they're developing the software. And then this came across my radar in 17 or 18, and I started buying some.

And I went to a, and then the scuttle but is that they're going to Apple card is likely to buy a license from them. The CEO starts to make allusions to the possibility of a large license deal. They had said they wanted to get out a licensed business and they only wanted to do processing and then a large company came along and wanted to do it. And 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 its 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 bureaucratic and CoreCard, the way they do their business. I mean, you know, they spend nothing on sales and marketing. Again, I encourage you to read their older transcripts. They're almost, 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. So they start, 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 sort of 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, Wex, W-E-X, I think, was an early customer of theirs.

They started out as a gasoline cards for the trucking industry. Yep. Or else, stay soon 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 TIS to CoreCard. So, and now as a result of both the Apple card and the General Motors card, it appears on their financial statements that Goldman is 80% of their revenues.

Yep. These are licensed customers, and 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. Okay, I'm going to take a pause here and just think about monthly accounts for a minute. My first shareholder meeting at a core card, it was before the Apple card

was launched, and there were more shareholders at the meeting. The question posed, the hypothetical question, because nobody knew the answer at the time, posed to the shareholders of the meeting, was how many average monthly accounts, active monthly accounts, would Apple have. have in the first year. And 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 on their Apple card? I do not know that, but having read all the calls in the past 24 hours, all the past four calls in the past 24 hours, I do know how quickly it turns out they grow. But I don't, first year, 25 million. So like people were right. I think I wrote down 50 million. People wrote down.

Some people wrote down $25 million. And then after the meeting, the CFOs emailed everybody some publicly available credit card data showing that at the time, American Express had about 15 million active monthly accounts. What is that company? What's in your wallet? Capital One. Capital One. Capital One was the largest credit card issuer. and they only have like 30 million active monthly accounts.

That makes sense. Now that you say it, saying 25 million does, I mean, there's what, 360 million American citizens, probably 80 million of them are children. It does make sense that you could, yeah. Right, it was much lower. It was much lower than everybody thought. And it reset everyone's baseline expectation, which is like, if they could get to two million active monthly users in a year one or two, like, that's huge.

If they could get to five, like, I don't, I don't. I don't know where they are now, but I believe they are, there was a big falloff from Capital One and the major players, and then lots of them down in the, you know, zero to five million active monthly accounts. And I think Apple's above that now, but again, I'm not 100% short. But it really set expectations for what they were likely to do. Again, but I want to stress, they sold these licenses for the Apple card and then later for the general loss card, but even back then, they wanted to get out of the license business

and wanted to do processing. And what they've done is they've taken these licenses and reallocated the money to building their processing business. So when I think about this business in toto, 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 licensed 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. Can I just let me just, so you've thrown so much out at us. Too much. I'm sorry.

No, that's great. So you've turned to, I just want to pause for one second. So the basics of core card is they do the processing for the issuer, not they acquire a lot of. They do the software that enables the processing that handles the processing and obviously their big the bottom eyes their big customer is Goldman Sachs who has the Apple card and now the GM card so but I do just want to check to make sure like my understanding was I know they get the licensing as you said every time it goes a little bit higher but I also they do get processing revenue from Goldman for the Apple card as well right correct they do get some processing revenue from Goldman as well for the Apple and the General Motors card okay perfect perfect just making sure

I don't know the breakout of that, but there is some processing revenue. 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 you 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 i think there's there's even the line in their 10k that says uh hey if we if somebody licenses from us often we have to send people to work with them to

incorporate our our 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 license correct correct and so there's uh there's a recurring revenue component to uh the professional services aspect as well. When you, and on top of it, when you, with this company, you also get a company with a really solid balance sheet that hasn't diluted shareholders that buys back shares when, you know, not in, 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, you know, hand out noodles 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. I mean, so White's 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. So let's jump. Go ahead. I was going to, I was going to sort of start digging into the company a little bit and the financials. And by the way, they do this. They've done all this. I'm just, I'm going to move the microphone a little bit. What they've spent on sales and marketing over the last, since one Q 2019 is

under $800,000. But they do all this with no sales and marketing spend. taking on one or two clients a year. They've got a slide in their most recent investor deck that, that shows their marketing spend over time. It's like the numbers are in thousands, and it's like $38,000 per quarter or something is what they're spending. And I saw it and I was like, that doesn't make me. It's got to be wrong.

Yeah. Well, I want you to dive in, but I do just want to jump in, as they said, I believe on the Q1 call after the news, Brooke. I do just want to jump into the elephant in the room, right? Like 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 Q1 card. The Apple Pay card, I think it's just the Apple card.

The Apple card, yeah. I think I'd just say because they use that. Yeah, the Apple card. But there are two different things. Like Apple Pay, I think, is more of a debit card. And the Apple card is a credit card. so when i use apple pay encompasses lots of yes apple pay encompasses so what they're getting is from the apple card you're you're 100% right but so there is on the q1 call they refer to 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 and they mention i think core card is mentioned by name as providing processing for the card they mentioned in the article in the bloomberg article they're mentioned by in the bloomberg article what core cards mentioned by name. They mentioned by name, hey, Goldman is the issuer of the card. Maybe Apple wants to think about becoming the issue of the card. I don't know if Apple wants to become a bank because that's basically what it would imply they do.

But maybe they want to get other people in. So I just want to turn to this is actually kind of really encompassing because you can talk about churn in different ways here and all sorts 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. Okay. One would presume that anything is possible. One could presume that you have revenue risk and anything is possible. So, but what are the reasons why it's unlikely? And what did the, 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, right?

If you look at the financial software and financial system, there are all these toll takers along the road, MasterCard, Visa, the issuer, everyone gets pennies or fractions of a pennies on a transaction. And 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 transaction fees on credit cards. And 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. I don't know if that was called Equifax and Transdine and the people who and 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 can make that assessment and that saves money on the issuance of the credit card. I think it's $25 to $30 per person who and signs up for a credit card goes to those agencies. those are the areas where I think Apple is looking to save money. They, you know, and 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 they're going to have something to make every phone a point-to-sale device or something like that. I remember reading something, these are the areas where it's going.

It doesn't make sense for them to cut out core card, especially because they bought a license. They already owned the software. And their ongoing fee to CoreCard for the growth in their monthly active users is, you know, maybe a million, two million every other year. It is not that much in the big scheme of things versus $30 for every one. who signs up for a card that has to go for a credit check 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.

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, right? They do 20 million of EBIT off of that. Goldman is 75 to 80% of their revenue. And all of Goldman revenue is not related to the Apple card, but the vast majority of it is in the licensing and the related professional services. But if you're Apple, I mean, if you, maybe it's not CoreCard specifically. And CoreCard, if I remember, 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 Apple. some way shape or I cut out core card in some way shape or form. So you're throwing out large numbers, but you have to keep in mind that one Q22, they had a roughly $13 million license revenue, all of which drops to the bottom line. Yep. And that was largely related to the general motors card going live. That's not an Apple card experience. So, um, You know, 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. But again, it's another reason why I mostly focus when I value this on the processing and maintenance fees, only solely on the process 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 right so so they'll be a time in place where Goldman the 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 issuances that Leland has talked about on the call with American Express, with cardless, with cabbage, the new cabbage under American Express, and the American Express small business side. They've talked about opportunities. They bought wire cards,

a Middle Eastern business, and they're issuing new cards through Saudi Arabian banks. They're expanding in South America. And 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 due

and let me stress, X-Goldman growth. And so they're reallocating this capital and the profitability of free cash that they're generating through the sale of these licenses largely to Goldman into X-Goldman growth. So that, you know, the things we're talking about today, which I don't think are that as much of a risk as the headlines would like you to believe,

that should also alleviate over time as the business outside of that area grows. Does that does that? No, it makes a total sense. It's just, you know, and again, like you follow this company for five years or longer. I followed this company. I mean, I think you first, I heard you mentioned them a month or so ago. I done, you know, 48 hours research on you. But the two things that worry me here are just the Apple concentration.

You see that. And it. Right. Like the Apple concentration, and including the Bloomberg, the Bloomberg article, Yep. Or take a lot of headspace from some people. But again, as you reasonably think through, where is Apple going to get the biggest bank 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. Do they want to build transit? If they did want to build a better transaction process, stuff, why would they just buy core card? I mean, to me, that's, it just doesn't make a lot of sense for me from a business case. 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, right? Like Apple leaves, Bill Zern, whatever. The, 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 their revenue, is thinking about how do we dive into this business further? And I know for a fact that specifically mentions Goldman has been talking about just buying Quarkar. Right. So I just want to ask your thoughts on that. And like for Goldman, that's a really interesting, it's an interesting way to think about Goldman has this buy versus build decision, right? How many software engineers do we need to buy to go and recreate this whole thing ourselves or buy a competitor and yank core card out in some way shirt perform. And I think that's interesting to talk about from the acquisition angle, because it also shows, Corcorter said, hey, we've had churn before, but we've never had voluntary

churn, right? We've had churn when companies like Wirecard have gone out of business. We've never had a company who's 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, you know, 70 or 80% of their revenue. Yeah. I mean, as a shareholder, 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. I mean, 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 think I don't think it's going to happen though until they reach at least 100 million in revenues which might not be that far down the road to begin with I want to I want to add just because I have followed this for a while I was in in 2018 I think I was at a at a gathering with a bunch of hedge fund managers and people were pitching and I sat through a pitch for a company called Carvana and I people were really eating it up. That's a dangerous name to drop these days. Well, right. And people were eating it up. And I had, I wasn't familiar with a company.

You know, I focused on smaller companies and I looked it in and I saw that, you know, they were burning $3 billion and had burned $3 billion free cash flow over the prior few years. And, you know, I get what they were talking about. But I was like, gosh, if people really like Carvana, people are really going to 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. And as an investor, that's not a terrible place to be. But when I think about this company, because you threw out a number. And so let's talk about this.

On a trailing 12-month basis, right? This company's traded at eight times, the $27. You know, the company's traded eight times EBITDA. Right? Because they have $25 million in trailing EBITA. I think there's a, you know, and 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 like the EBITA associated with the licensing. And again, this is a much more conservative way of looking at it. And like I said, other shareholders are like, you can't back out all of it because they're going to get licensing revenue in the future.

is they will, but let's just take a most appropriate, a most conservative look at it, which is, you know, for the purpose of investing, why not? You know, you have to be able to hold multiple ideas in your head at the same time. So if you back that out, they're doing about 12 million in trailing EBITDA. So this is traded at 17 times a trailing EBITDA X licenses, which I would argue is not an unfair multiple for a company that's growing plus 20, 30, percent a year, top line, 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 reasons margins are down, for a number of reasons, margins are down, employee costs have gone up. They've grown their headcount. Part of what they're doing is they're growing their head count ahead of new launches. And what really sort of triggered my excitement was on the last conference call when, I'm a lot. I'm a lot of on 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. Yep.

And that was really important to me because this year, again, let's just talk big numbers and headline numbers. Total revenue, you know, year to date is $53 million, $54 million. Let's see, 15 of that is a license. So that's 15. And again, I don't look at license as a recurring revenue. So next year is one cue. Sales are going to be, revenues are going to be tremendously down year over year. EBITO is going to be tremendously down here over year.

You're going to look at this print and everyone's going, 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. You know, I don't know how the market's going to respond. I think you could say, well, it's going to sell off and maybe there's another buy an opportunity. I don't know. But when the CEO said that next year at 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. And the likelihood is they're going to have them. And, and now you're looking into 2024 where, you know, I don't think next year they're going to, 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. And, you know, I pitched this on the manual of ideas in 2019. And my, I mean, I don't know if the presentation is still available, like it says you want, but if, you know, just my broad thinking about it was like, if you think this is going to get to 100 million revenue someday, you don't need to sharpen your pencil and look at the forecast and the valuation. I think if this is a hundred million dollar revenue business at 25, 30 percent EBITDA margins, you could slap a multiple on it. I think it's going to be worth more than 250 million in, uh, in market value and it's still growing and there's still an optionality and opportunity for continued growth and it's well managed and it you know in my last letter to my investor maybe it was in the two Q letter I wrote about this a little bit substantively and Leland the CEO says it's all the time it's like we're not the only ones who do this marketa can do it again the

larger companies can do it just takes them longer and it's a little more cumbersome there's a lot of fintech companies do it but what corkard does from an investor perspective unlike say marquetta is they're doing this profitably and free cash flow positive you're you're not getting diluted and it gets back to when I was on the cell side a client called me to talk about a company and at the time there was nothing really tremendous happening in the news flow of the company. It was a company called M-Corps, which is a terrific company, a mechanical and electrical specialty services. And it wasn't anything particularly, and it was sort of like, I don't see what's on the horizon. And the portfolio image just said to

me, but I could buy this today and I never have to think about it again. And to me, it was always, it was like, oh my God, like, of course. Of course, the problem you're dealing with is allocating capital. And if this solves a problem for you, you'll get a, you'll get, you'll get, you'll get high returns over time and you don't have to think about it. I mean, that's, I like that. And I can tell you, I've allocated stuff to worse that I've certainly had to think about. Let me ask a few, a few just lingering questions I've got here. First, they frequently said, and you started talking about, I mean, you, you did talk about how I've got Marquetta's last 8K and earnings pulled up over here. So how Marquette is doing this is a loss.

But CoreCard frequently says, hey, we sell a premium product at a premium price. And 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 to, and that's just not us. So I just want to ask you to, as an outsider who hasn't followed this for years, what makes their processing for the issuer premium versus, you talked about how this server, whatever, has something that be a little clunkier, but what makes them premium?

What makes them Apple, who we know loves premium and customizable stuff, 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? my understanding is that they're software and i haven't i'm not a software engineer um but my understanding is that they're able to handle complicated credit transactions there and i'll try to find

exactly the transcript it was what he talked about pro pro bass fishing it was that was an example they gave or um that must have been old i i would love to i was old and 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. That's where, why they're able to have a premium product. Why, you know, as Lee Lind has talked in prior calls, he's like, if you want to use us, 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. And as he did mention that on the call, he says, if you're one of the customers who's listening to us and say, well, we have a whole. 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.

And 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 or 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, right? That's the, I mean, 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. 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. P-Sys, First Data, FISA.

Okay, so it is those guys. None of them are in-house or anything. Yeah, these are, I mean, American Expresses think has always done it in-house. But these are not, you know, the credit card business has been around for a long time. The use cases for the software have been around for a long time. The software that underlies 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, is they've already started to rewrite this entire code in Java to,

updated for the next programming language. Amex is interesting. I don't think we have full time to talk about it, but they did, there was something on one of the past couple of calls where they were like, the American Express is opening up its network. Again, I'm not privy to, you know, 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. And it is a business where everyone's trying to sell something. Sales CEOs are always talking in their book, but I followed this company for a long time. Their CEO has always been a straight shooter. And who knows if they're going to win? Who knows if he doesn't know the future is any better than you or I do?

And anything is possible. But if they're in a position to sign two wheel customers late next year, then 2024 starts to look a lot better than this year. And 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 own shares for it. That's how I meant to start the thing out. You said, I just love the pitch used the last time I heard you talk about it.

Where is it? This is a company that belongs in every small cat portfolio, whether it's a growth portfolio or a value portfolio. One last thing. You mentioned the CEO, and I've really, I told you before the call, I really enjoyed hearing him. I do think he's a straight shooter. You know, in Q2, he said, hey, look, we had some wire card revenue in 2021.

We obviously lost it because Wirecard was a house of cards. So you guys can back that 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, right? So the stock is down a decent bit over the past year, partly due to 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. 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, buy back shares. Yeah. That is exactly it. But, you know, I just, I think it's refreshing and I think it's nice. He, I can't remember what call it was, but he said, look, when we're going to buy back shares like we are long-term conservative shareholders, when we see value and we see, when we see value in the shares, we're going to try to buy back the shares at that time frame. And, you know, recently they've been buying back shares at a decently nice clip. So, you know, if you're a long-term

shareholder and you see this straight shooter CEO who's coming on saying, 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. Andrews, what I was doing, my due diligence on this company, back when I was really digging in and earlier on, you know, Parker Petit from MyMedics used to be on the board. And there was some, There was a short report. I think Spruce Capital wrote an idiotic short report on this. And, you know, rehashing.

On CoreCard, I didn't realize that. On CoreCard, yeah, it was wonderful. It was wonderful because there was 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, right?

This small company, we had this, we had this very funny conversation. And this person, first of all, she's like, it's not a fraud. This company's not a fraud. And Parker's on the board because he has a long-term relationship through Georgia Tech. And, but she said, this executive said something very funny. they said um adored leeland but but gosh uh he he would say things like solve no problem before its time that was his and and there were things would pop up and he and he said solved no

problem before assignment and 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 that and that and And this person said, you know, I think that's his thinking behind why Parker Pettus 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. And I've talked to him out for with Leland and it really is his M.O. 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 operating 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. And 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, it's customer chain, it's employee. and shareholders, you know, I don't see why you wouldn't want to own that. 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 quickly, 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.

other company where the CFO is the first to speak every time, right? Like normally the CEO, he's the chairman, he's the president, normally he comes on and says first and, hey, maybe I'm just having the wool pulled over my eyes or something, but it does seem to me, it seems like somebody who doesn't have an ego, just letting the CFO go first. And that is the smallest thing I've ever seen. But when you said it, and I've just, I'm really tickled by the CEO just having read the past four or five calls. I will say that. We, we have gone over an hour and I do. I can't I believe how quickly an hour went, Andrew. I did not expect to go this fast, but I'm sure all your, all your guests say that. All of them do. Sometimes I'll have guys 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 of earnings and the thing will be over. But I do want to give you a chance. Anything, look, I actually had a lot of other notes to talk.

about, but I 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? I mean, just, you know, I've talked a lot about how I look at this on a processing basis. And you should really look at one Q19. 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, I mean, 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 that 10-time sales trailing, recurring revenue is not a crazy multiple, just on that alone. It's not a crazy multiple on that alone. That might be 2021, obvious speaking. Okay, so I don't know. But that's just the processing doesn't include the professional services, or any other aspect of the revenue. You did mention 2019 versus, I mean, post-COVID, I will just say, like, I pull out my

physical credit card and use it a lot less than, you know, if you've got an Apple of the phone, it's the double tap on the right and you touch. And just obviously that COVID growth bump has already happened. But I do think people have had that that physical double tap and tap just ingrained in them post COVID so that, you know, you've probably locked in a much larger user base as more people go to Apple, Apple cards or any type of thing. Like I do think you've just, you've got more of that. And that's pretty interesting from a growthy perspective as well. Cool. Well, Avi, this has been absolutely great. I know you do great work on microcaps.

I know we've got one or two other in common that actually might be too small for this podcast ever mentioned. But I really appreciate you coming on. And I'm looking forward to having you on again in the near future. There's more information about my firm at longcast advisors.com. I appreciate you having me on. Happy to chat again, obviously any time at your convenience. Let's spend any time with you. I appreciate it.

And look, everybody, there's going to be a 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 Longcast and everything through that. All right. I'm good.

Thanks so much, man. Thanks, Andrew. See you next time. A quick disclaimer. Nothing on this podcast should be considered investment advice. Guests or the hosts may have positions

in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks. Thank you. Thank you.