ACI Worldwide Inc (ACIW) 2002 Q3 法說會逐字稿

Good afternoon. My name is and I will be your conference facilitator today. At this time I would like to welcome everyone to the Transaction Systems Architects third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you.

I will now turn the call over to Bill Hoelting, Vice President of Investor Relations. Mr. Hoelting, you may begin your conference.

Thank you, and good afternoon. I'm please to be back in the IR role for TSA. For those of you who don't know me, I was in the IR role for TSA from the mid 1990 through 1999. I look forward to working with the TSA investors and analysts in the future. The participants for TSA's third quarter earnings conference, Greg Derkacht, CEO, Dwight Hanson, CFO, Mark Vipond, President of ACI Worldwide, Jeff Hale, Senior Vice President, and David Stokes, General Counsel.

This conference call could contain forward-looking statements pursuant to the Safe Harbor provisions of Section 21E of the Securities Exchange Act of 1934. Actual results may differ materially from those projected in the forward-looking statements. Statements during the conference call that are not strictly historical statements could constitute forward-looking statements, which involve risks and uncertainties which could cause actual results to materially differ from those in the forward-looking statements.

These risks and uncertainties include those contained in TSA's filings with the SEC. Areas covered on this call today that may constitute forward-looking statements include the following: the growth in worldwide debit transactions, electronic statement presentation, electronic bill presentation, and payment markets and the impact on TSA's business, TSA's business initiatives in the Internet, chip card, wireless commerce, and the e-commerce markets, and any statement dealing with the future prospects or results of the company.

We are pleased that you have taken time to join us today. Our agenda for the call will be as follows. Greg Derkacht will start the call by providing an overview of the quarter. Dwight Hanson will then present the financial results. will give an overview of ACI Worldwide, and will present an update on the and intranet business units.

Greg will then close the prepared remarks of the call, at which time we will open up the conference call to your questions. At this time, I would like to introduce Greg Derkacht, CEO of Transaction Systems Architects, Inc., Greg?

Thank you, , very much. Good afternoon, and thanks for all of you attending our calls. We sincerely appreciate your interest in TSA. I wanted to give you a few highlights for Q3, but first I'd like to say we've made good progress on a number of fronts. We saw improved flow of capacity upgrades, we added another top 100 U.S. retailer during the quarter, bringing our total to 25 of the top 100, and we have now shipped the latest release of our e-payments products to over 100 customers.

In addition, we secured a new long-term commitment from for our newest version of Money Transfer System product. We continue to perform well competitively, as our customers appear to value our robust e-payments solutions and our commitment to improve financial health of the company. Although overall we had a good quarter in a clearly difficult market for information technology spending, results in our channels were mixed.

License and activity improved slightly, with customers reconfirming their commitment to our e-payment platform. Also driving this improvement is an increase in e-payment transaction volumes. In light of the difficult economic conditions, we were able to generate $55 million in revenue. We also continued our effort to adjust our cost model to reflect the demand picture, allowing us to deliver improved earnings and strong cash flow during the quarter. Our operating margin has throughout the fiscal year, and our cash balance is the highest that it's been in two years.

This is evidenced by our earnings per share of $0.12 and our operating cash roll for the quarter of $10.5 million, producing an end cash balance of $59 million. Dwight will provide further commentary and detail as it relates to the above mentioned numbers. Thank you, and over to you, Dwight.

Thanks Greg, and good afternoon to everyone. I'll start off by recapping some key financial items for the quarter. Revenue for the quarter was 65 million, which was at the high end of our guidance. Pro forma operating expenses were 60.7 million, pro forma operating income was 4.3 million. And pro forma earnings per share was $0.12, which exceeded the high end of our guidance.

On a GAAP basis, net income was 1.3 million, and earnings per share was $0.04. Our operating cash flow was 10.5 million, and our ending cash balance was 59.3 million. And our backlog was 179.1 million. Our results for the third quarter continue to reflect the slow IT ending environment. As mentioned previously, our revenue was at the high end of our guidance, but our performance in this financial metric reflects the growth during the last-

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high end of our guidance by 3 cents. While we are pleased with this performance that probably won't be repeated.

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during the middle of the second fiscal quarter. The 56 million of revenue is comprised of the following: license fees of 35.6 million, of which 20.5 is initial license fees and paid up front fees, 2.8 is license fees with extended payment terms beyond 12 months. 10.2 million is monthly license fees and 2.1 million is custom development fees. Maintenance fees was 19.1 million and our services revenue was 10.3 million. On a year-over-year basis, license fees declined 15%, maintenance fees increased 4% and services declined 24%. The declines in license fees and services are tied directly to the overall market condition in the IT industry that I've mentioned previously. Basically, we are maintaining a consistent amount of transaction volume upgrades while new revenue from installation of our core products continue to be down on a year-over-year basis.

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basis. Particular those new installations of core products are a key driver to our services revenue. The increase in maintenance revenue is a result of our continued customer retention rate as well as the impact of new customers going live during the last 12 months. Revenues for each of our geographic channels are as follows: the U.S. - 21.7 million, America's International - 16.1 million, - 19.3 million, and Asia Pacific - 7.9 million. Revenues for each business unit are as follow: ACI - 48.7 million, Insession - 7.7 million, and Internet - 8.6 million.

Pro forma operating expenses for the quarter were 6 million and declined sequentially of 2% from the second quarter of this year and 16% from the third quarter of last year. The change on a sequential basis is primarily due to the sale of Regency in February as well as reductions in our employee compensation expense, which resulted from staff reductions which took place during the quarter.

Our head count as of June 30th was 1,650, which is down from 1,745 as of March 31st of this year and 1,954 June 30th of last year. The resulting pro forma mid income for the quarter was 4.2 million and earnings per share of 12 cents. In the calculation of our pro forma results, we excluded three items. The first is 1.2 million of software amortization associated with acquisitions. This is an item that we have historically excluded from our pro forma results. The second is a 2.2 million write down of our investment in . This adjustment is due to the continued decline in the value of the Nestor shares over an extended period of time. We have now fully written-off this investment. This is also and adjustment that we have historically treated as a pro forma item.

The third is a $478,000 add-on gain on the sale of Regency. This resulted from a purchase price adjustment in the form of additional, of an additional cash payment we received from S1 during the quarter. Our pro forma results were computed using an effective tax rate of 40 percent. Our GAAP results for the quarter were net income of 1.3 million, and earnings per share of four cents. These GAAP results include the three pro forma adjustments I just mentioned.

As I noted in my opening comments, I also want to point out the fact that our results the quarter reflect a $1.8 million foreign currency gain. This gain is a result of some significant currency movements that occurred at the end of the .7 million is management fees of 4.7 million improvement. First we had a number of licensed contracts signed in the third quarter, in which the revenue will be recognized over the course of the 12-month period in which we view backlog. This represents approximately $7 million of the change. The second reason is due to currency movements, which accounted for the remaining 2.4 million of the change.

From a cash flow perspective, we had another solid quarter. We generated positive operating cash flow of 10.5 million, and our cash balance at the end of the quarter was 59.3 million. Our DSOs are 147 days, and our DBOs are 54 days. The marketable securities line on our balance sheet reflects the shares we own in S1 Corporation. We received these shares as partial consideration from the sale of Regency. S1's share value has declined between the time of the Regency, between the time the Regency transaction closed, and our receipt of registered S1 shares.

At June 30th, due to the short amount of time we have owned these shares, we have treated the decline in the value of this investment as temporary. Going forward, we will continually assess the carrying value of this investment to determine if a write-down is necessary. I'll close by providing guidance on our expected fourth quarter results. Overall, our guidance is based on the premise that demand will basically remain flat during the next three months. This, combined with the reduced expense run rate allows us to reiterate our revenue guidance of 62.5 million to 67.5 million, and pro forma earnings per share of eight to 13 cents.

Thanks for your time this afternoon. Next Mark Vipond will provide you an update of our ACI business unit.

Thank you Dwight. Good afternoon everyone. I am here to give you an update on ACI Worldwide. We continue to operate in a very difficult economic environment, where our customers have tightened operating budgets, reduced capital spending, and slowed the deployment of new payment systems. In light of these conditions, we were pleased with ACI's results for the third quarter of fiscal year 2002.

Some of the highlights include significant systems and capacity upgrades at 13 customers, including New Zealand. These upgrades took place in all regions and illustrate the continued growth in electronic payment volumes, and the impact that volume-based pricing has on ACI's ability to deliver positive financial results and to sustain investment in our customer's mission-critical solutions.

ACI licensed four new customers and 13 additional applications to existing clients during the quarter. This included sales of our 24, , , , , , and . We saw particular strength in our Canadian, Asia-Pacific, and U.S. retail operations. The diversity of our operations continues to provide a buffer against difficulty in specific regions like Latin and South America. We now have more than 30 live customers on our latest release of , with over 100 clients having taken delivery of the software.

We are starting to see an increase in our services backlog as our clients look for assistance in moving to this new release. This is especially true in our European operation. In this difficult economic environment, I am proud at the performance of ACI and all its employees. We have made some difficult decisions about products, markets, and our cost structure, yet have maintained our investments in strategic products and provided superior service to our clients. This will serve us well as we move forward.

Looking into the future, we continue to remain cautious about the closure rate of new business. We do not see any significant change in overall market demand, but we feel good about our ability to deliver positive results during this difficult time, and we believe ACI is well positioned for growth, and we believe ACI is faster once our customers start increasing their capital investments.

Some of the positive signs we see include our fourth quarter backlog of business is solid, and has increased as a result of new applications and services we sold in Q3. We have already signed three significant upgrades in the U.S., Australia, and India this quarter. Interest in our payment engines remains solid and our investment in multi-platform solutions has been repeatedly validated by our clients and prospects as being the right vision for the future.

Our investments in the ACI commerce framework are getting more traction as customers realize the value to be gained by using a proven, integrated solutions set that addresses the breadth of payment processing requirements. In summary, Q3 was a solid quarter for ACI. We delivered good results and we made good progress in positioning our company for success in the near and long term. Thanks for your continued interests, and I will now introduce to give you an update on the other TSA operating units.

Thanks, . Good afternoon, everybody. I wanted to give you a brief update on how the Intranet and technologies did -- this unit did in the past quarter, and the prospects for the future. First, Intranet, the unit that concentrates on corporate e-payments solutions.

As you may recall, Intranet's primary focus has been the process of migrating its customer base to an open systems version of their money transfer system. That process is going very well, and this quarter we were fortunate to sign Bank of America for significant migration projects. In addition to the customers in project mode, we now have 12 customers live on the IBM AIX platform. Revenue had grown year over year, and margins are improving. We're engaged in over 30 migration projects in the States, as well as some major new customer installations in western Europe.

Intranet had another solid quarter in Q3 and is expecting more of the same in Q4. Our competitive positioning at the high end of the market is strong. , we're beginning to fill the footprint in Europe. Of course, the European theater is a bit soft in terms of IT spending but we are seeing some activity and are optimistic regarding our prospects in the coming quarters.

Next, Insession Technologies. Insession markets eInfrastructure solutions primarily for enterprise class transaction processing applications. Insession's business is mixed right now. Insession is in a transition phase as they move to more open system space solutions. As you've heard, this is a difficult market in which to drive these solutions but we are making progress. Insession was able to maintain good margins in the quarter, in part due to tight cost controls. In addition, Insession added 11 new customers during the quarter for a wide range of products. We expect Insession to maintain strong contribution margins as they move through this product transition process. In addition, we expect Insession will be a strong contributor to TSA's overall strategy of building recurring revenue based on the products in the market that they address. Now, I'll turn it back to Greg for a few closing comments..

Greg D: Thank you Joe. Now that you've heard out details of the quarter and our guidance for Q4, I would like to close with a few comments before opening it up to questions. I would like to reiterate, I'm pleased with the overall progress with the overall organization in the last several quarters. We have done a good job aligning our cost structures with the realities of the market. Our profitability and general planning should continue to improve. As we have discussed previously, one of our main objectives is to continue to improve our reoccurring revenue levels. We have and we will continue to take steps towards realizing this objective over the long term. We continue to invest in key technology as a response to market needs and we expect these products to contribute to our financial performance as we go forward. Our commitment to product investment, customer support, industry leadership will ensure that we are positioned to serve our markets in the long term. I believe that if market conditions improve, we will significantly benefit from the actions we have taken recently. Thank you again for your time and interest.

At this time, Dusty, we would like to open up the conference to the Q&A.

Yes, sir. At this time I would like to remind everyone if you would like to ask a question press star then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from of William Blair and Company.

Hey, Bill, welcome back.

Thank you, Franco.

You were very kind not to point out that during your previous period that negative stock went up 300 or 400% right, well, we're looking for you to do the same.

So are we.

First of all, good job, kind of navigating through, as you point out, this very tough environment, I have a number of questions, really related to understanding, kind of, you know, how far down the road will be the light at the end of the tunnel, so to speak, and a couple of things. First, I wanted to ask you a little bit about the break out of software and Greg, I'm going to make some reference to the second quarter numbers as well just to kind of understand some of the sequential changes, if that's okay, if I may.

It looks as though, as a percentage of total software, you are continuing to see a little bit of a trend towards more paid up front. Is that, do I have my numbers right and is that, you know, part of your strategy or is it sort of just responding to client requests?

Is this your strategy? Yes, it has, there has been a slight increase, that's correct.

And then, Greg the other thing, well actually, you know, I need, I need you to remind us, when you give us the geographic breakout, the U.S. is, just what the breakout is now?

Yes, that's me Dwight. I've got, I'll go back through that. The U.S. is just the states obviously. 21.7 million.

Right.

The Americas International, and we're referencing Canada, Central and South America, 16.1 million. was 19.3 million, and Asia Pacific, 7.9 million. And that's across all three business units.

So again, just to make sure that I understand. I think sequentially it looks as though U.S. domestic was down about seven million, and U.S. international was up about seven million, which is, which is good. But Greg, you've made comments in your prepared remarks that Latin America was very weak, which I guess means that Canada must have really picked it up for you?

That's correct.

OK.

There were several large contract signed in Canada last quarter.

So we can't blame Canada right?

No, we wouldn't want to.

And then one actually for Jeff Hale, if I, if I may. Jeff again, in the third quarter I think I have it right, IntraNet had a particularly strong quarter in that, in the second quarter. And I think that was really, you know, the migration to the RS/6000 product really kind of hitting on all cylinders. Is there, is there anything much to be read into a sequential decline in IntraNet, or is this just kind of regular course of business?

Yes, it's just regular course of business. As you know, based on the nature of the contracts they sign, example Bank of America, they signed pretty large contracts, generally the revenue recognition they use is percent completion on those projects. So a lot of it comes down to the timing of customer situations on projects, and a, and a few contracts. The velocity of contracts in IntraNet is usually pretty low, but the size is pretty high. So you're going to see some movement up and down. But I wouldn't read a trend into that.

On the other hand, Mark, the, you know, sequentially ACI was up really nicely. Up about three million or so.

Yes. And it was due to, as I said before, we added a significant number of capacity and recommitments from our clients. Canada was the shining light in that. We had, as I mentioned, , and CGI, excuse me, were very significant upgrades. So it's, you know, that's a positive sign. Will that continue? I just think it's pretty much right now in terms of demand for the business, it's about the same.

OK. One final question, then I'll shut up and let other people ask a question. It is obviously very important and very encouraging that you're seeing some pick up in e-transaction volumes, let's call it that. I guess I'm a little surprised to hear you say but it's already generating upgrade activity, because I guess I would have, I would have guessed that, you know, relative to where you were, you know, a year ago, you know, volumes would have come down, but people wouldn't have, you know, reduced their capacity.

And so I'm kind of curious, are we back to, you know, kind of e-transaction volumes that we would have seen 12, 18 months ago? And if, and if so, then, you know, I guess we should expect to see good upgrade activity going forward, and with that I'll hand it off. Thanks.

Yes. My answer to that would be it depends on various customers. Some of them are buying future capacity because they do see growth. So it varies by market and by individual clients. I've had some clients tell me that September, and others continue to grow, especially the emerging markets, in double-digit growth every year, and actually 30, 40 percent every year. So it varies by markets and by customers, and so some of the capacity upgrades is based on the -- anticipating future capacity and trying to lock in a price now as opposed to wait until the last minute.

I think the other thing you'll note, , if you -- I don't know if you when went through on the upgrades, but virtually all of them this quarter were outside the States. So I think that speaks to, you know, a little bit of a difference from what we're seeing in the U.S.. I think the other thing you'll see start to happen is you'll see some more consolidation happen. And as we've always said, that tends to help us out. But it's generally forward licensing in non-U.S. countries for Q3.

Great, thanks. Now, we'll have to to run through the a bit more slowly because we can't write that fast. Thanks for your time.

Your next question comes from of CSFB.

Hi, this is Sam John in for . I'm trying to get a sense of the impact of the foreign exchange fluctuation.

We've got -- that's just the backlog part, when you look at the P&L the revenue and expense component typically naturally hedged themselves on our P&L because we have enough business in local currency in the act of the revaluing of balance sheet items that ...

So on the top line you're saying that there's no real impact.

Well, on the top line I'm saying is that we're moving up in a manner such that it's not a material impact on the operating income line.

All right. And can you also tell us -- give us a sense of what you plan to do with your increase in cash balance.

Well, at this point we've been working hard to manage the business to grow the cash balance from a pretty low point of over a year ago when we had debt and not a lot of cash to the position that we're at now. So our objective doesn't change from that. We're still -- we're still -- have structured the company to generate positive cash flows, and we're going to continue to do that. We don't have any specific plans in mind that we need to share with the group at this point with respect our cash, so.

Great, thanks a lot.

Again, I would like to remind everyone, if you would like to ask a question, please press star, then the number one, on your telephone keypad. You do have a follow up question from Franco Turinelli.

Hi, sorry it's me again. Just a follow up on that previous question. Dwight, the MLS, I think, fell by I think it was a couple of million, sequentially, is that right?

I don't think it was that much, but both the maintenance -- the two recurring revenue line items that we got -- I remember we had Regency in for a portion of the quarter ...

OK.

... in Q2, and a lot of their revenue sources were recurring revenues, Franco, so that's the majority of the change, both maintenance and in the as you look at those two.

So, just a follow up from a prior question, there is not a significant MLS impact from the foreign exchange fluctuations?

No.

OK. Great. Thanks.

Gentlemen at this time, there are no further questions.

OK. We thank you for your interest in TSA and for attending our third quarter conference call. That concludes our call for the day. Thank you.