Description

Summary

Corecard (CCRD) was formerly named Intelligent Systems (ticket: INS). There is an earlier VIC write-up on this name as INS as well as further background on the company in Longcast’s letters over the years, which can be found online.

CCRD provides software, consulting and processing services that enable its issuer customers to deliver highly customizable credit card offerings. Although it has existed for many years in obscurity, it rose to prominence due to its licensing partnership with Goldman Sachs to manage the Apple Card.

Since CCRD emerged on investors’ and the industry’s radar a few years ago, it has garnered a schizophrenic reaction from the market. The company isn’t easily classified. At times, it trades like a commoditized, low value-add BPO with high customer concentration risk. At other times, it is perceived to be a differentiated, if conservative, fintech consulting company that owns a valuable software stack. 

I believe there are data points to support the latter case, though the company will still need to prove that to investors through customer wins and execution in the next few years.

• Gross margins in the 50-60% range vs. low 30’s for BPOs and ACNs of world and 45-55% for FISV/GPNs 

• Projects sustained 20-25% growth despite employing zero sales force

• Chosen to manage the credit card product for one of the most demanding consumer technology companies in the world

• Excellent reputation with industry insiders wrt to technology and dependability

While the founder and CEO, Leland Strange, is pushing 80, he is still passionate about the business and whistles on his way to work. He has historically run the company very conservatively and thoughtfully, almost as if it were a private company. While the resulting business has been an attractive point of differentiation for its big partners, it has also resulted in a lack of headcount capacity, self-service capabilities or distribution/implementor network all constraining its growth. There appears to have been a subtle regime change over the past year, however, that points to a more ambitious future. I further believe an acquisition is a reasonably likely exit possibility.

The company is not a hypergrowth tech business, and it does not pretend to be one. However, it operates today at 20-25% guided sustained revenue growth (actually grew ~35% in 2021 and guides to 20-25% in 2022), 50-60% gross margins, 25-30% operating margins (currently depressed due to replatforming project and new offices). If it can prove itself out beyond the GS/Apple success, it is undervalued vs. businesses with inferior growth rates and margin profiles. Liquidity, low tradable float, small market capitalization, limp analyst coverage and perhaps lack of easy classification hampers this business far from achieving a more reasonable valuation range of, say, $50-$80 per share in a year or two's time.

Commoditized BPO/Processor or High Value Technology Platform?

The large headcount (750 people worldwide), mix of licensing/professional services/processing revenue and India base for its business (~550 headcount) has led many investors to the conclusion this is a low-tech body shop business. Aurelius put out a short report along these lines in 2019, along with a guilt-by-association smear related to MDXG’s disgraced CEO (http://www.mavalue.org/research/ins-a-wolf-in-petes-clothing/) Due to ownership and technical factors, CCRD has been susceptible to negative news and attacks. 

CCRD has addressed all of the key accusations and executed on their business. Further, the CEO and CFO have been clear and forthright about their plans, weaknesses, strengths and unknowns - refreshingly so when most C-execs are basically drug pushers nowadays. 

More fundamentally, the credit card back office is perceived to be a commoditized, low-tech corner of the industry. (General investor reaction to investing in credit card processing: “GTFO.”) However, there is a vast difference between using adequate, one-size-fits-all services for your standard affinity card and collaboratively developing a superior credit card customer experience while simultaneously staying in full compliance with lending regulation.

The latter requires a far higher level of flexiblity in upfront customization, real-time decisioning to not botch customer and regulator interactions, the extensibility to add future functionality, and an engineering team to quickly version those changes. This means the underlying technology platform matters if you are positioning in this complex revolving credit category. CCRD references the Bass Pro Shops example in its Q4 2018 conference call to explain what “complex” revolving credit entails and how some merchandisers chose to use credit as a differentiator with customers.

CCRD has made decisions that put its technology at the center of its business. It is in the midst of a replatforming project that compresses operating margin but will only show results several years from now. 

Rather than pretend I’m some kind of expert on code base, ledger technology or the intricacies of revolving credit regulation, I refer readers to the circumstances of the company’s business growth and commentary from industry insiders. I found some of the Tegus transcripts particularly enlightening about the company’s reputation in the industry, so I’ll include some key excerpts throughout the writeup. I’m not sure what the proper etiquette is, so I’ll leave the quotes unattributed, but the experts are all senior fintech executives from forward-leaning companies you will know.

“So, we didn't realize it at the time, but it was actually a really great decision that we made to go with CoreCard because it was more flexible and scalable, could accommodate super-high transaction volume, which we had. And they had teams that they could throw on building new features when we needed them, and we weren't subject to big bank like quarterly slow-release cycle” 

“So if you look at CoreCard, that's the third one I talked about in the modern issuer space, in the processing space, in the modern issuing processing space. They actually process the Apple Card. So they have a really sound system. And the Apple Card, you probably heard about it, along with Goldman Sachs market. That is being processed by CoreCard. They have, again, a fantastic system that would be a really good option default. So they are kind of doing that big tech kind of space.”

“So I did get a lot of demos on CoreCard. Transparency, I never ran a card portfolio on there, but we did a tremendous amount of due diligence, one would expect as you go through a tech stack on an acquisition. So their system is kind of a hybrid in between.

They have a lot of the configuration dashboards, if you will, set up. So it is more or less managed by the end user in a nontechnical capacity. So you can go in and do that configuration, and then they write the changes to the back end to actually alter the system.

Their UI/UX is not pretty, like it's not great, but the functionality is there. I think that they're way, way more proven than some of the new players. They don't have the brand recognition as Galileo or Marqeta, but CoreCard is running the Apple portfolio.

Yes. So I mean, obviously, the Goldman Sachs' has had a lot of success with the card portfolio. So I think there they're demonstrating, obviously, that they're a key player and capable in the business.”

“... the founder of CoreCard reached out and then what is surprising to me is that over the years, CoreCard has remained the only real-time credit processing platform that exists.”

“So CoreCard is really in that Marqeta space in many ways. What they don't provide that Marqeta does is all of the program management around getting that set up. So that is like working with card vendors, getting our work done, testing statements, like all those things that have to happen to communicate with customers. CoreCard doesn't do any of that. They're like here's a car. If you don't know how to drive, you better figure that out.”

“Well, I mean, again, if they're focusing on credit issuance and they're using their system for that, there's a risk in that. There's risk in messing that up. It's hard. Somebody like CoreCard, they could come out. They could just like hire 100 people and be like now you do program management. And they could come out and start competing in that space. I don't think they're going to, based on what I know about them, but they're good. Or CoreCard could be acquired by a company that wants to do that with it.”

As an outsider and non-technologist, I’m vastly unqualifited to making blanket pronouncements on which tech platforms go in what Gartner quadrants. But, I believe there is a lot of evidence to suggest that CCRD’s technology stack is superior for certain kinds of clients that want to deliver an enhanced customer experience.

Risks to the Apple Relationship?

CCRD has a high degree of customer concentration with Goldman Sachs representing 71% of revenue in 2021. The majority of this revenue is related to the GS-managed Apple Card, with a smaller but increasing amount attributable to GS’ conversion of the GM Card hitting in 2022.

Like many off-the-beaten-path small cap names, CCRD has gotten kicked in the teeth over the past few months. They took an additional hit on Bloomberg’s recent recap on Apple’s fintech ambitions. 

https://www.bloomberg.com/news/articles/2022-03-30/apple-is-working-on-project-to-bring-financial-services-in-house

Oddly enough, this is not new news. The article, as well as Apple’s acquisition of Credit Kudos, essentially regurgitates news from last year, just in a slightly more shaky equity environment. 

https://www.bloomberg.com/news/articles/2021-07-13/apple-goldman-plan-buy-now-pay-later-service-to-rival-paypal

Also, the new article specifically reiterates that Apple’s first foray will likely be BNPL and that its GS/CCRD relationship would stay intact.

While it is possible some investors owned CCRD on a “ride Apple’s and Goldman’s coattails” thesis and thus sold on the news, the company has been clear this has never been their focus. They are happy to take on new projects for GS/Apple, but have always their sights set on broadening their client base with significant new customers.

If CCRD’s CEO is correct, the intricacies of complex credit card functionality and compliance are the critical elements that make their position in the product stack very difficult to replicate or replace. This is on top of the base-level pain for Goldman and Apple would endure to rip out the system and replace it. Also, it isn’t clear there are peers which can match the combination of functionality, expertise and labor cost CCRD can deliver for such a large ad demanding client.

Some supporting quotes from industry insiders:

“So if you have a good relationship and things are working, as you're getting bigger, you actually get some inertia and disincentive to change because you don't want to take a risk. This is the same thing that happened with the Apple Card when Goldman issued the Apple Card.

They placed it with little CoreCard, oh, another southern-based company, surprisingly. Because they knew that CoreCard was very steady. They didn't have to worry. They obviously could not take a risk on anything going wrong.”

“CoreCard is one that nobody knows about, which is really fascinating to me. But when I tell people that they do the Apple Goldman Card, they're like, huh? Really? … The Apple Card is amazing, and I don't say that about credit products ever. It's just the whole experience about applying for it, activating the virtual card on your phone right away, the way they deliver rewards instantly, the activation process, the plastic on your phone, it's like just nuts.”

Growth or No Growth?

While CCRD’s software platform has the capability to do debit cards, prepaid, BNPL, etc. - all the “in vogue” stuff that others are chasing, it has never been a focus for the company because the company’s CEO does not see these businesses being defensible or complex enough to warrant their time and effort. He certainly puts his money where his mouth is, as he gleefully shorted MQ and loved to talk to investors about how terrible businesses like AFRM are. They have also never productized their platform into a sexy “____ as a Service” like some of the flashier lossmaking fintechs.

For better or for worse, they have resolutely stayed the course as a platform-focused software company with industry-leading (for its niche) technology that is delivered through a specialized professional services organization. 

This leads us to a key leg of the investment debate around the company as relates to its growth trajectory. While the company guides to 20-25% sustained (though irregular) topline growth, a casual look at consensus would suggest a slowdown to 10% growth in 2023.

CCRD was not historically built for growth and its history can cast doubt on its growth as purely a once-in-a-lifetime luckout on the GS/Apple relationship. Not only did they employ zero sales force, they also did not plan ahead for workforce expansion ahead of demand. Thus, while they have taken on new accounts since the GS/Apple relationship, these accounts have been incremental in scale only.

This is changing. CCRD has historically located the bulk of its workforce in Bhopal, India. Last year, they announced a big initiative to grow Bogata, Colombia into a new center of excellence and are also evaluating other locations as well. In addition, they plan to increase their India office by roughly 50% this year. At the same time, the company has added … ½ a marketing person. I believe this provides some circumstantial evidence that the company is far from demand constrained and deeply supply constrained. Either that, or they are supremely overconfident.

Some side commentary on the topic:

“I mean, CoreCard is not a huge company. So I really haven't really even heard of them a whole lot until the Apple deal, right? So they never really haven't hit my radar screen. So part of CoreCard's problem is they're just not doing proper marketing and branding, and they're not out in the marketplace. I mean, I've been in credit cards, my entire career. I kind of went through my resume and I hadn't really gotten a lot of exposure to CoreCard until Apple picked them.”

The company’s ambitions are to have its expanded workforce productive and ready to take on a second customer on the scale of the Apple Card by this year, which does not do much for 2022 revenues (given a multi-month ramp to launch a complex new card), but means that big revenues would begin to layer into 2023. I believe it is likely they already have a good idea who this customer (or possibly customers) would be and are building to meet their service requirements. Culturally, CCRD is simply not a company that builds on spec. 

If the company’s technology is good, it continues to do a good job for its clients and revolving credit products are not obsoleted, there should be a long runway for them to continue taking on some of the most forward-looking projects in the industry. 

Shareholder and Trading Dynamics

This company is owner-operated, with Leland Strange owning 18% of the company. Funnily enough, the 2nd largest (10%) holder is the founder of Metallica’s management company. Most of the other top holders are long-only institutional shops with some modest hedge funds participation. Despite not having significant hedge fund participation, it does tend to bounce around due to low trading volumes, high retail trading mix and likely some quant trading. 

Valuation

CCRD trades @ 8x forward consensus EV/EBITDA and 13x consensus P/E with net cash. FISV trades at 16x/50x. ACN trades at 17x /28x P/E.

I have no idea what the right multiple is for this company, but I could see it readily integrated into either a fintech services platform or even perhaps a technology consulting platform. 

SoFi at one point did onsite diligence on CCRD to evaluate buying the company. While they were impressed with the tech, the main reason they didn’t proceed (according to a member of the diligence team) seemed to be CCRD’s lack of immediate capacity to take on new projects after signing the GS/Apple deal. This capacity constraint is now changing. SoFi eventually acquired Galileo, a CCRD competitor.

Trying to call quarters will be an exercise in futility with this company. CCRD will exhibit irregular and nonlinear revenue growth patterns, have margins that fluctuate and will have growth tied loosely to the success/failure of its clients’ launches (based on card sign-ups, not $ spent). Historically, its earnings results have often not correlated with the stock price reaction. In addition, the company is run like a private company without the dog and pony show for public shareholders, including no earnings smoothing and making investments in new offices and software replatforming that pay off tomorrow, not today. 

Practically speaking, this stock is one you should own only if you believe the technology is leading edge, you trust the management team to execute, and you believe the fintech trends are not leaving revolving credit in the dust. If these assertions are correct, then this company is exceedingly cheap and has substantial headroom for rerating as catalysts occur and investors pile in. 

Risks

Disintermediation of Apple Card relationship and/or Goldman relationship

Credit cards stagnate or die out due to newer payment alternatives

Inability to execute on growth initiatives

People-based business (loss of talent, wage inflation, difficulty scaling)

Technological or business model obsolescence from overly conservative management

Lack of long history operating at this scale and growth

Catalyst

Expansion and customer diversification efforts are proven out

Acquisition by a fintech (or consulting company? or less likely a partner?)