ACI Worldwide Inc (ACIW) 2002 Q4 法說會逐字稿

Good morning. My name is Amy and I will be your conference facilitator. I would like to welcome everyone to the TSA Q4 conference call. All lines have been placed on mute to prevent background noise. After the speaker’s remarks, there will be a question-and-answer session.

If you would like to ask a question during this time, simply press * and then the number 1 on your telephone keypad. If you would like to withdraw, press * and number 2. Thank you. I would like to turn over to Bill Hoelting, vice president of Investor Relations.

Thank you and good morning. The participants fur TSA fourth quarter earnings call are Greg Derkacht, President and Chief Executive Officer, Dwight Hanson, Chief Financial Officer, Mark Vipond, President of ACI worldwide and David Stokes, General Counsel.

This conference call could contain forward-looking statements pursuant to the Safe Harbor of section 21-E of the Securities and Exchange Commission act of 1934. Actual results could differ materially from those projected in forward-looking statements. Statements 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 forward-looking statements.

Forward-looking statements include the following: any statement dealing with future prospects or results of the company, and forward-looking statements identified in recent form 10-K filing. The agenda for the call will be as follows. Greg Derkacht will provide opening remarks for the call. Mark Vipond will discuss the Q4 highlights for ACI Worldwide. Dwight Hanson then discuss the Q4 financial and adjustment that resulted from the reaudit and Greg will provide his closing comments and we will open up the call to your questions. At this time, I would like to introduce Greg Derkacht.

Good morning. I want to thank you for attending this morning's conference call. First, I appreciate your patience during the reaudit. With the completion of the reaudit and January 13th filing the form 10-K and amended 10-Q, the company has been notified by NASDAQ it is in compliance with the NASDAQ marketplace rules.

Financials have been certified in accordance with [inaudible] and as of Friday, we will resume our trading and our previous assembled TSAI. As indicated in previous releases, and the 10-K filing, there have been changes in certain of accounting policies which we will discuss further in this call. Along with the changes in our accounting policies, as outlined in 10-K we will continue to make adjustments to strengthen our internal procedures and financial controls. Reaudit was very time-consuming process. We dedicated enormous amount of worldwide staff and resources from finance departments around the channel to complete it. During this difficult time, our operating business units, ECI Worldwide, intranet. In session, continue to focus on customers in their respective markets.

Interest for fiscal 2002 as follows. TSA sold Regency Systems which was no longer strategic to our company operations. We announced our open platform system strategy with BASE24-es. TSA -- excuse me, added 49 net new customers for total of 747. The company made reductions in cost from continuing operations.

2002 was challenging with the weak economy and a difficult spending environment in the IT industry, we believe we continue to build our leadership position in e-payment market. During fourth quarter, TSA added 17 clients with 9 from ACI, 7 from In session, and 1 from IntraNet. I will give a brief recap for IntraNet and In session and ask Mark Vipond, president of ACI Worldwide to give recap for ACI Worldwide.

IntraNet, Revenue for the quarter was $10 million 300 thousand dollars, and for the yaear, revenue was 38 million 230 thousand dollars.

For the quarter, IntraNet signed 1 new customer and two capacity upgrade for Money Transfer Solution. IntraNet has 65 customers. In session, revenue for the quarter was 8.4 million dollars and $34.1 million for fiscal 2002. For the quarter In session Technology signed 7 new customers and now has 345 customers throughout the world. At this time, I would like to have Mark Vipond, president of ACI Worldwide give recap on the fourth quarter highlights.

Thank you, Greg. Good morning, everyone. I will update fourth quarter results for ACI Worldwide. ACI revenue for the quarter was $51.7 million, and for the year revenue $210.5 million. ACI finished the year with 528 customers throughout the world. As Greg has indicated, economic conditions continue to be challenged in many parts of the world. However, ACI was able to sign new business during the quarter. Highlights include System and capacity upgrade of 19 customers. These upgrades took place primarily in the US and regions and illustrates continued growth of electronic volumes in our customer base. ACI licensed 9 new customers in the quarter, including 4 BASE24 clients, two Commerce Gateway, one Win-Pay 24, one Smart Chip manager and one Pyments Manager customer. ACI licensed 16 new applications to existing clients during the quarter. This included sales of EMV, Proactive Risk Manager, Payments Manager and Commerce Gateway products.

Of a particular note, 9 of the 16 new application sales were from Proactive Risk Manager product line. We believe these results continue to validate our product direction and the value they provide to our customers. With the ACI framework commerce and platform integrated payment systems, we believe we are positioned to capture business when spending increases in our market space.

We are pleased with the market reaction to BASE24-es announcements. In addition to providing value for our existing ACI customer base, our HP NonStop servers, BASE24-es operates on IBM D series hardware and available on Solaris technology. This product solution is generating opportunities in both existing and new customers and should position us to grow in e-payment software market. Thank you for your continued interest and I will now introduce you to Dwight Hanson to give TSA financial update.

Thanks, Mark. Good morning. Today I will be discussing fiscal 2002 fourth quarter financial results, as well as giving you some highlights related to the adjustments that arose as part of the reaudit we recently completed. I will start with the fourth quarter financial results.

The key items for quarter were revenue was $70.4 million. Operating expenses were $62.8 million, which included $1.5 million of goodwill impairment. Operating income was $7.6 million. Net income was $1.1 million and earnings per share was 3 cents. Our operating cash flow was $35.3 million and our ending cash balance was $87.9 million.

These results and all of the financial results, which I will discuss today reflect various adjustments made as part of the reaudit process I will be addressing shortly. The $70.4 million of revenue is comprised of the following. License fees of $39.3 million, of which $19.3 million is initial license fees and $20 million is monthly license fees. Maintenance revenue $18.6 million and services revenue was $12.5 million. Revenues for each of the geographic channels follows. US revenues were $29.6 million.

Our Americas International revenues were $8.9 million. Revenue in Amia region were $24.8 million. Revenues from Asia/Pacific were $7.1 million. Revenues for each business unit were as follows. ACI $51.7 million. Insession $8.4 million. And IntraNet, $10.3 million. Operating expenses for the quarter were $62.8 million, which includes charge of $1.5 million related to further impairment of the goodwill associated with our direct business, which is part of our ACI Worldwide business unit.

Our headcount as of September 30th, 2002, was 1,586. This compares to head count of 1,839 as of September 30th, 2001. During the fourth quarter, our other income and expense totaled $4.6 million of expense, which is comprised of the following. Interest income was $600,000. Interest expense was $1.2 million. And other expense of $4 million, included $3.6 million of marketable security impairment charges. I will talk more about the interest expense item in a few moments. The result in pre-tax profit is $3 million.

Our effective tax rate for the quarter was 64%, which was driven up by the nondeductible goodwill impairment charges, tax valuation reserves we established for the impairment investment losses that were reported during the quarter, and non-recognition of tax losses in certain of the foreign subsidiaries. Net of tax our profit was $1.1 million, resulting in earnings per share of 3 cents.

From cash flow perspective, we generated operating cash flow of $35 million and our cash balance at end of the quarter and end of the year was $88 million. I would like to now turn your attention to the adjustments that resulted from the reaudit process. My comments will be directly primarily at some of the more significant of these adjustments.

On the revenue side, there were two areas that gave rise to the majority of revenue adjustments. First, we changed our method of recognizing revenue for extended payment term contract. We previously referred to these items as roughs, which is short for recognized up-front revenue. Our prior policy was to recognize upon delivery the present value of our BASE24 contract that is had guaranteed payment terms. The difference between the upfront recognition on present value basis and the ultimate amount collected from the customers were reported as interest income.

License revenue recognized under these contracts was $60 million in 1999, $30 million in 2000, $21 million in 2001 and $9.6 million through the third quarter of fiscal 2002. This method of recognizing license revenue was discussed in detail in our prior SEC filings.

As a result of the reaudit, we have changed our method of accounting for these contracts to take the license revenue as the fees are due and payable, rather than upon delivery of the software. Term of these contracts is typically 3 to 5 years; the result was to spread the revenue out over the term of the contract.

For some contracts, we previously sold off or factored the payment stream to third-party finance companies and received cash proceeds. With the revenue from those contracts being derecognized, we have created new balance sheet line item called debt financing agreements, which reflects future revenue to be recognized from contracts sold to the factoring companies.

In effect, it is a deferred revenue item and totaled $43.3 million as of September 30th, 2002. In addition, this treatment has resulted in the reporting of interest expense in P&L. This interest expense represents the difference between revenue recognized each quarter under these contracts and the net present value proceeds we received by the factoring company. Second item of revenue I would like to discuss are VSOE adjustments. Most of the contracts we separately state license term and maintenance term. For those contracts in which the term of the maintenance is greater than 50% of the license term, we have changed our policy to reflect recognition of license fees over the maintenance term rather than upfront upon delivery of the software.

Let me give you an example of the adjustment. Assume that customer A has contract that has five-year license term and 3-year maintenance term. Assume that customer B has contract with five-year license term and two-year maintenance term. Under our prior accounting treatment we would have recognized license fee upon delivery of the software in both scenarios. Under revised accounting, we will recognize license fees for customer A over the three-year maintenance term and for customer B recognize all license fees upon delivery of the software. The effect of this adjustment is to spread recognition of license fees out over a period of one to five years for those contracts that have maintenance terms greater than 50% of the license terms.

Final item I would like to discuss is goodwill and software impairment charges we recorded for investment and messaging direct. Previously we recorded impairment adjustment on messaging direct goodwill on October 1, 2001. As part of the process we reevaluated the timing of this adjustment and determined it was appropriate to record this adjustment September 30th, 2001, which in effect moved impairment charge from fiscal 2002 to fiscal 2001.

In addition, we are evaluating messaging direct business and also concluded it was appropriate to take impairment charge for the underlying value of the software we acquired as part of this acquisition as of September 30th, 2001. As result, we fully wrote off this asset at this time. Thanks for your time. Greg will provide closing comments.

Thank you, Dwight. Next I want to open up for questions. First, bear in mind we just recently have completed and turned our attention and focus to the preparation of Q1 financial results.

Given the resources committed to this process, we have just begun to analyze the impact the accounting change will have on our business model. So, you may have questions regarding Q1 results for our model and model going forward, at this time, it is too soon to properly address them. With that in mind, I would like to open up the call for your questions. Thank you.

At this time, I would like to remind everyone if you would like to ask a question, press * and the number 1 on your telephone keypad. We will pause for a moment to compile the Q and A roster.

Your first question comes from Franco Turrinelli with Bill Blair & Company.

Getting this behind us, right? The question I have for you is Greg and maybe Mark, your opening comment was that the reaudit has been very time consuming and required significant results. I think we appreciate that. But, the question is also to what extent have you been able to protect the operating units from this distraction and to what extent has this represented a drag in your ability to compete effectively in the marketplace?

You are asking two questions, one more difficult than the other. First, to the extent we have been able to and attempted to shield the operating units from the requirements associated with reaudit. I am saying, of course, individuals and resource report up individual units.

Overall, as I mentioned before, each unit has a separate president and basically operating staff. I think on relative term, I would say they have been pretty well shielded from the actual resource requirement. Second question that you asked, of course, any time you go through a process like this, it is time consume has an impact. I would say overall basis, from a realistic perspective, customers have moved forward and put our strategy in the marketplace. That is where we are at.

That is Mark, we have been fortunate not to be involved in day-to-day aspects of reaudit. We had some inquiries from customers and prospects, but depressed them as best we can with the interest we could share. We haven't lost business because of it.

Mark, also, again maybe two questions take them in whatever order you would like. The 19 capacity upgrade seems like positive indicator of maybe the fact that people are now getting closer to having used up the capacity they may have pre-purchased back in the Y2K planning or indeed that transaction volume in the marketplace is finally picking up a bit and forcing people to make those capacity upgrades. Is that a fair assessment or is it too early to tell?

My comment is if you look at the last few quarters, I think we have seen similar level of capacity upgrades. So, I didn't view the Q4 results to be anything extraordinary. I think it is back to normal and I would expect something similar -- it varies every quarter. Customers have different reasons, but about the same as the last year.

Do you have any sense, Mark, of backlog of demand or capacity demand, you know, building up the people maybe trying to hold off those decisions and when we finally hit that point where they can't put those off, there will be pick-up in activity?

I wouldn't say that. People are cautious. If they don't have to spend money, they won't. But, I don't see the capacity increases changing materially. It is about the same. They don't see anything different in the future.

Overall visibility, I think we are probably in the same position we have been for the last several quarters and have seen nothing to significantly change the marketplace at this point in time.

Mark, the Amere results seem pretty good given what we have been hearing from other companies with kind of Amia almost grinding to a halt. You seem to have been able to fight your a through that a little bit.

I don't agree with the statement. Of all the regions from the business, Amia is probably the softest economically. We see that still today.

One final question maybe for Dwight. Maybe not, maybe more business issue. The one line item jumps out in the year-over-year revenue comparison is decline in services. That I don't think is affected in any way by the reaudit if I remember correctly. Any color on what is going on there?

You are right that line was not impacted from the reaudit. In general, that just reflects the lower demand that was seen for use of our services. Customers are deploying their own staffs or from a competitive standpoint, we are seeing competitors willing to sell services at lower rates than we are.

I would also say product initiatives we are definitely focused on deployment, which reduces the amount of customization and the chance people have to look for services. I would expect that is the right model for our business and we will do that as much as possible. The services may never come back to the way they were in the past now.

Interesting. That is more of a product and strategy shift for you, it sounds like?

Services are a necessary part of business. We would like to focus more on license fees.

Right. We should make sure we should confirm the line item is typically been lower margin than the rest of the business. So. Yeap. Great. Thank you. I will stop hogging the call and let something else jump on.

Your next question comes from Arthur Bender with Credit Suisse First Boston.

What do you plan to do with the cash on your balance sheet, do you plan on buying shares?

We have made no determination for the utilization of the cash. We are looking at various alternatives. But, again, we just don't know at this point in time. So, I would say shortly, within the next several months we will have some kind of plan as to utilization of a portion of the cash.

Okay. Can you talk little bit about growth prospects for ACI both overseas and here, exist new and how fast in general do you think you can grow the business?

I will let Mark, to the extent he can, answer the question.

From the standpoint of our opportunities, we are very excited about the BASE24-es. Activity levels around the world aren't materially changing from the last year. Business out there and opportunity and people asking questions. But, people are still very hesitant to spend their money. I don't see it growing dramatically in places -- if you recall several years ago, Asia/Pacific was in dull drums and it has stabilized.

US is stabilized and Latin America is designated (inaudible). The European marketplace is probably the softest of the largest markets. I don't see anything changing in the near future. We keep flogging away at individual deals we chase. There are some deals coming up, but nothing materially different in terms of demand opportunity.

There has been a big increase both credit, Defendant's Exhibit And ATM. You know, some of the bigger outsourcing companies start the concord e and reported nice increases in profitability in the last couple of years. Can you sort of give an explanation in terms of maybe your business strategy or product mix as to why TSA hasn't enjoyed similar growth during this period when end-markets are growing nicely?

It is a fair statement relative to US marketplace, specifically; there is a lot of activity relative to folks like Concord, ESS. The service is going after market share. There is some customers, banking customers and retail clients, where they don't necessarily see their network as strategic and we will consider that as lower cost option as opposed to having control inhouse with their own inhouse solutions.

We have seen pressure in the US marketplace and to a bit in Canada, also, for outsourcers going after the marketplace by offering cut rate prices. And primarily we see our customers who view and value control and see the strategic value of having controlled networks from a competitive prospective to retain their systems. There is pressure on the mid to small-sized relative to going to outsourcing to lower cost.

Pressure of that type starting to build overseas or limited to the United States?

Mostly in this marketplace, but doesn't mean it won't end up overseas. Think about the country boundaries, it is not as simple to get the critical mass to go across the borders.

Right. Finally, in terms of overall revenue, are you focused more on increasing recurring revenue or up front licenses? Can you give us a feel?

That is the value proposition across the board for all organizations. So, no, we are not backing off from the model we talked about previously.

Great. Thanks very much.

Your next question comes from Steven Frisia with Evergreen.

With the balance sheet and cash flow of the company being so healthy, I was wondering if you could comment on your policy of factoring going forward? Doesn't seem to be a need to factor. Also, if you could speak to at what rate you would expect that financing balance to decline over what period generally speaking?

I will let Dwight answer.

Right now we don't have any strategy to pursue selling off payments. We did that when our cash balance was lower and we were able to better match up cash flow and revenues. Now that revenues have been pushed off into the future, we don't need to match it up.

Secondly, with cash balance where it is, we don't have the need to do that. That stuff turns really over the life of the contracts and those contracts range from 1 to 5 years. I think it is 43 million in total at the end of September. A lot will turn in the next 2 years. Some will be out in the third year. Primarily over the next two to two and-a-half years.

Okay. And another question. Just reading the 10-K, Insession seemed like it's -- I don't know how strategic it is to the rest of the business. Can you comment on how strategic you view that business segment to the overall company and what your plan is for that business?

I think I mentioned previously, the plan is to retain the business. It does have opportunities in HI and in some cases Internet. It would appear to be a similar business from our perspective. There are a lot of opportunities, we feel. The organization has to handle the organization. We feel there is cross-over between the organizations. So, every intent to retain the business.

Thank you very much.

In order to ask a question, press * and the number 1 on your telephone keypad. Your next question comes from James Armwith with Henry Armstrong Association.

Good morning. Question with respect to recognizing backlog. I don't know if it is too soon to answer this question. I think I saw that backlog was recognized only to the extent it goes up 12 months. Is that correct even though these contracts may have license 3 to 5 years? On the book we show backlog 12 months?

We haven't disclosed backlog at this point. We haven't compiled that, but have focused on reaudit getting P&L and balance sheet pulled together. What we have done in the past with backlog, James, backlog was contracts that we had signed that we haven't recognized revenue and had selected 12 month view to that. So, your 12 month logic is correct when we were disclosing the backlog. at this point, we don't have backlog out there in any public documents. That will be something down the road.

With respect to sort of steady state cash flow, now that all these adjustments have been completed, what would you estimate the current steady state cash flow to be on a quarterly basis or annual basis?

At this point in time, we are analyzing Q1 and we are analyzing our business model. We haven't drilled that into the same bucket, basically, in the process of analyzing impact on the cash flow. So, I really don't think at this point in time.

Too soon to answer the question is this

That is right. Appreciate the question.

How much goodwill is messaging direct, how much has been written off and still on the book?

I think about 8 and-a-half million of goodwill on messaging direct's books at this point.

Of the whatever, 47 million or something we have written off almost 40, is that right?

Approximately.

Okay. Thank you.

At this time, there are no further questions. Do you have closing remarks?

We thank everyone for their participation this morning. That concludes Q4 conference call. Thank you.