ACI Worldwide Inc (ACIW) 2003 Q1 法說會逐字稿

Good afternoon. My name is Brianna and I will be your conference facilitator today. I would like to welcome everyone to the Transaction Systems Architects first quarter conference call. All lines have been placed on mute to prevent background noise. After the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time, press star, then the number one on your telephone keypad. If you would like to withdraw your questions press star and the number 2. I will turn the call over to Bill Holtin (ph), vice president of investor relations.

Thank you and good afternoon. The participants for TSA's first quarter earnings conference call are conference call are Gregory D. Derkacht, President and Chief Executive Officer, Dwight Hanson, CFO, and Mark Vipond President of ACI worldwide and David Stokes, General Counsel.

This conference call could contain forward-looking statements pursuant to 21-E of the Securities and Exchange acts of 1984. 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. Forward-looking statements include the following; any statement dealing with the future prospects or results of the company and the forward-looking statements identified in our recent FORM 10K and 10Q filing. Mark will discuss the Q1 highlights for ACI worldwide. Dwight Hanson will then discuss the financials and then Greg will have closing comments. I would like to introduce Mark Vipond, president of ACI worldwide.

Good afternoon everyone, I'm here to give you an update on the first quarter results for ACI Worldwide. ACI revenue for the quarter was 45.6 million dollars. While economic conditions throughout the world continue to be challenging ACI was able to sign new business during the quarter. Some of the highlights include system and capacity upgrades at twelve customers. These upgrades took place in all of our geographic regions.

This number of upgrades is consistent with our first quarter last fiscal year. ACI also licensed seven new customers in the quarter, one Base-24, two proactive risk manager, two smart chip manager and two large customers who license our new Base-24 solution on Unix server technology.

We were pleased to see our strategy of deploying a multi-platform payment result in tangible sales success in the quarter. We licensed 15 new applications to existing clients during the quarter including sales of proactive risk manager, payments manager, commerce gateway and new Base-24 add-on products. With the framework and continuing investment and multi-platform integrated payment systems we believe we're positioned to capture business.

We're also pleased with the market's initial reaction to our new product announcements. ACI's Base24-es The new automated key distribution system automates the management and encryption keys at ATMs are generating opportunities in existing and new markets. We believe our R&D investments will drive more business for ACI as economic conditions improve throughout the globe.

Finally, I want to clarify some comments I made in our last quarterly conference call about the competitive landscape related to EFP (ph) service bureaus in the United States market. ACI has always competed against outsourcers who offer EFP services to financial institutions and retailers in the U.S. Some of the outsourcers who we compete against with are also ACI customers. In today's market, we continue to see active competition from outsourcers in the small to mid-tier financial institutions. That has not changed.

We have also experienced an increase in competition in our traditional market of large financial institutions. But we continue to win many of these as large FI's continue to prefer to use our software to keep control of their networks and service levels. At this time we have not seen a material change in our business as a result of these activities. Thanks for your continued interest and I will now introduce Dwight to give a TSA financial update.

Thanks Mark and good afternoon. Today I will be discussing our fiscal 2003 first quarter financial results. First I'll start by highlighting some key financial metrics that we achieved during the first quarter. Total revenue was $62.5 million. Operating expenses were $55 million. Operating income was $7.5 million, net income was $3 million and earnings per share was eight cents. Operating cash flow 4.6 million. Our cash balance was $88.1 million and our twelve month backlog was $229.3 million.

The 62.5 million of revenues comprised the following: Software license fees of $31.3 million of which $11.2 million was initial license fees and 20.1 million was monthly fees. Maintenance revenue was 18.6 million and our services revenue was 12.6 million.

Revenues for each of our geographic channels were as follows: United States, $29.9 million. America's International $7.5 million. EMEA, $16.9 million and Asia Pacific, $8.2 million.

Revenues for each business unit were as follows: ACI, 45.6 million. Concession (ph), 7 million, and Intranet, 9.9 million. Total revenues of 62.5 million represent the decrease of 14.7 percent as compared to the first quarter of last year. This decrease was predominantly in our software license fees and services revenues. In addition $1.5 million or 2 percent was due to the sale of Regency Systems which took place in the second quarter of fiscal 2002.

The decline in license fees was primarily due to a shift in demand to our newer products such as Base24-es and our payments management products during the first quarter of this year as compared to the first quarter of last year. This shift will generally result in a difference in timing of revenue recognition as the revenue from the newer products is typically not recognized until customers put the products into production. Whereas revenue from the more established products is typically recognized upon delivery of the products to the customer.

Additionally, while the number of capacity upgrades was consistent between quarters, the value per upgrade declined year-over-year. The decrease in services revenue is the continuation of a trend we experienced during the prior year.

There are a number of items impacting our services business. First, in an attempt to better manage costs, more customers are using either a lower cost service providers or in-house resources to fulfill their requirements. Second, our newer products such as Base24-es, are architected in such a manner there will be less of a need for associated services work as compared to the classic version of our Base-24 products.

Operating expenses for the quarter were $55 million, which is a decrease of 10.5 percent as compared to Q1 of last year. This decline is primarily due to the impact of our staff reductions that have taken place over the last 12 months as well as a reduction in our software amortization of 2 million, which is due to some items becoming fully amortized.

Approximately 2.5 million of the expense decrease is due to the sale of Regency. Our average staff levels were 1,191 for the December 2002 quarter compared to 1,845 for the December 2001 quarter. During the first quarter our other income and expense netted to expense of 1.8 million which is comprised of the following: Interest income of 310,000. Interest expense 956,000, and other expense of 1.1 million of which 900,000 was due to loses from foreign currency transaction adjustments. The resulting pretax profit was 5.7 million dollars.

Our effective tax rate for the quarter was 47 percent which is based on our overall expected rate for the full fiscal year. This compares to an effective rate of 59.5 percent for fiscal 2002. We continue to analyze our options with respect to further reducing our overall effective tax rate. Net of taxes, our profit was 3 million which resulted in earnings per share of eight cents.

From a cash flow perspective regenerated positive in cash flow of 4.6 million and cash balance at the end of the quarter was 88.1 million. Our ending backlog was 229.3 million which is comprised of recurring backlog of 154.7 million and non-recurring backlog of 74.6 million.

The recurring components are monthly license fees of 77.3 million, maintenance fees of 72.6 million, and facilities management fees of 4.8 million. The non-recurring components are license fees of 47.9 million and services of 26.7 million. We include in backlog all revenues specified and signed agreements to the extent that we believe that recognition of the related revenue will occur within 12 months.

One final note relates to information we have been requested to provide regarding our recurring revenues for prior periods. We had previously provided this information for the full fiscal year.

So with that in mind, I'm going to give you our quarterly recurring revenues for the last two fiscal years. First I'll start with monthly license fees - in 2001, monthly license fees in Q1 were 20.6 million, in Q2, 20.5 million, in Q3, 20.6, in Q4 21.8 million. Monthly license fees in 2002 Q1 were 21.1 million, Q2 were 21 million, Q3 were 19.5 million and Q4, 20 million. Facilities management fees as follows: 2001 Q1 1.2, Q2 1.5, Q3 1.5 million and Q4 1.6 million. Fiscal 2002 facilities management fee, Q1 1.4 million, Q2 1.4 million, Q3 1.1 million, and Q4 1.2 million. We also include in our recurring revenues maintenance fees and those are separately stated in our financial statements so I won't read those to you in today's call.

Overall, as a percentage of total revenues our recurring revenues for the first quarter were 64 percent which compares to 58 percent or all of fiscal 2002 and 53 percent for all of fiscal 2001. Thanks for your time this afternoon. I'll now turn the call for to Greg for closing comments.

Thank you everyone for joining us. Now that you heard details of our first quarter I would like to close with a few comments before opening up the call to your questions.

As you know, the past six months have been a busy and trying time for our management team, the entire company, and around share holders. During this time, we have had 11 quarters of financial information reaudited, we dealt with NASDAQ on listing matters, we absorbed multiple changes in the way of recognizing revenue and finally with today's call we completed a filing of our first quarter financial results.

So where are we today? First I'm pleased to say that we're caught up with the current compliance requirements. Our Q's and K's are filed with the SEC. With these items behind us we're now focused on the impact to our business model these recent changes will have. The past six months activity was primarily focused on applying our new policies to historical customer agreements. During this time we spent effort trying to determine the impacts on our business going forward, but honestly the focus directed more towards the past and thought the future.

The future is now our main focus. We're diligently analyzing our business model to determine what changes need to be incorporated into our strategy. This analysis on going is my intent to give you more specifics once it is updated. But I will tell you today that it is my objective to continue moving the company towards a recurring revenue model. We believe a number of these changes that have been incorporated into our revenue recognition policies move us in that direction. I'm a firm believer in the recurring revenue model and based on my discussions with many much you, you agree with this approach.

Until our business model analysis is completed, we're not in a position to provide you with guidance for the future periods. We're not shying away from this topic, it is just a matter of making sure we have all the appropriate information before we give you our assessment of the future. Although we're not in a position to give you guidance today, I would like to make a comment about the 229 million dollars backlog that Dwight previously reported you to.

As you know, backlog is an important measure as it gives us a sense of what the future holds. Simple math will tell you that our backlog of book business is greater than our current expense run rate, however, I do want to make sure that you understand that our expense run rate will increase as a results of our current environment. The job we have in front of us is to determine how much additional revenue we can reasonably expect to achieve from new agreements that will be added to our existing backlog.

Another area that we're focused on is our internal control structure. As we discussed in our annual report we're pursuing changes to our internal controls and we are devoting additional resources to these efforts.

On a separate note, we received a number of questions about our cash position and intentions with respect to future use of this cash. At this time, we plan to continue building our cash position while we analyze the strategic uses of this asset. As I look to the future, I'm more excited than ever be to be part of TSA. My first 12 months on the job were not what I envisioned when I accepted this opportunity.

I truly believe that the events we have been through will make TSA a better company in the long run. When you combine the future benefits of these changes with our new product initiatives, the cost reduction effort implemented over the last twelve months and the improved cash position of the company, I believe the company is stronger than it was a year ago and moving in the right direction. Thanks for your time today, appreciate your support, and with that in mind, I would like to open it up for your calls and questions. Thanks very much.

Your first question comes from Franco Churnelli.(phonetic)

Questions for Mark, if I may. Mark, I guess we used to have a good sense of seasonality. These are obviously not normal times. Can you give us a sense for how much you think a normal seasonality factored into the December results?

I can give you my perspectives. Our fiscal Q1 is always the most difficult quarter relative to sales in that most of our customers fiscal year end in September and certainly from our sales people as well as our customers they are geared towards that Q1 with the Christmas season which is always one of our softest quarters. I would say from a sales standpoint that this last quarter was pretty good for us. But Dwight mentioned earlier a lot of the sales that we made were some of our newer products which have revenue issues that we can't recognize until we get them live in the customers.

That coupled with the, we also mentioned capacity upgrades. While a number of them were consistent with what we have seen the Pennsylvania year, the dollar values were not as high. We also saw Q1 the same issue. So it's been pretty consistent.

And you mentioned in the fourth quarter conference call your assessment of your opportunity in EMEA and clearly that was evident in this set of first quarter results. What is your take of EMEA ? Will we see further deterioration before we get improvement?

I'm not a good prognosticator. I would say it's stabilized. I think we're seeing good activity, the same level of activity this quarter. It is still this softest region that we have in the world right after Latin America. EMEA would be second. I don't see that changing materially for a while, especially with the risk of a war pending.

You mentioned something about upon further reflection that is interesting. You mentioned that the upgrades were smaller in dollar amount than in previous experiences. Is that because -- I guess I don't know how much flexibility customers have in choosing how much capacity or functionality to add. Or is this just a function of the type of products that they are upgrading for capacity?

I don't think there is any trend. It's just the way the deals floated in that quarter. Sometimes when customers do capacity upgrades they may say hey let's work out an arrangement where I buy for the next two years and some may buy it the for the next three months. It just so happens that the ones that we signed in Q1 were more of the let's just plan for the next three to six months as opposed to looking out for two years so they weren't as large.

Thanks for providing the historical and current revenue breakout. I was one of the people hounding you for that. Also, reestablishing a history of backlog, I think will be useful to us. Are you able to give us what the backlog was at the end of the fourth quarter is that not something you took the trouble to calculate at the time?

We're not going to go through that drill. It would be --

I'm just trying to understand Mark's comments that we were able to make a number of sales that did not show up in revenue. I'm wondering what the increment in backlog was without being specific because that's where they would have flowed?

They would have flowed into backlog or they could be out beyond 12 months also. It depend on the cycle. Some of the newer products I would say some are beyond 12 months because they are longer project cycles, just due to the nature of the newness of the products. But we don't have a dollar figure relative to how much of the total backlog was Q1 sales versus other items.

Thanks, Dwight.

The next question comes from Art Bender (ph).

Good daporday. Can you tell us who your biggest customers are both financial institutions, retailers, then also if any of the major transaction outsourcers are using ACI?

In terms of financial institutions it's difficult to say by size but its Bank of America is one of our largest. NatWest, Barclay's Bank, gosh the list goes on and on. It depends on which market you are in. Royal Bank of Canada. CIBC is one of our largest customers. Processors - it's Maneris (ph) up in Canada, Medavante (ph) here in the states. Pfiserve (ph) one of our largest customers. Total Systems is a large customers of ours. Retailers, includes people like The Gap, Kmart, Speedway, Target is one of our largest customers, Esso.

Can you talk a little bit about the competitive environment on the retail front?

The retail front has always been a fairly fragmented and competitive. Probably our biggest competitor for in that marketplace is a company called S-2 (ph) for what we do. We have been successful in the U.S. in the retail market space and continue to have good prospects there as well as in Canada. Latin and South America we have some success in Mexico.

The rest of the world we have primarily petroleum customers but we continue to see some activity in the U.K. but not a ton. S-2 is probably our biggest competitor.

Can you talk about your reaction to the Wal-Mart lawsuit and what kind of impact it might have if they are victorious on companies within your customer bed?

I don't think I'm well versed enough to make a comment on what the impact would be. It's been going on for a while and will probably drag on for quite a while. I haven't really though through what the impact might be.

Thank you.

Your next question comes from Mark Eller .

Hi guys. I don't know if it's a comment or a statement as far as the cash position. You know, it's hard as a shareholder to -- if you don't have the faith to come in and do something yourself when essentially you have got a stock that's got an enterprise value of $3.50 at this point. If things aren't a whole lot different than they were a year ago and the environment looks fairly similar, which means that you should be able to generate some decent amount of cash going forward, you know, I can't see a reason why you wouldn't look at your company at this stage in the game where it's trading as a good investment. Because prior to all this happening the stock was hovering between $10 and $12 a share. Again I think you guys ought to give heavy consideration to it, because if you are not buying it, then why should we as shareholders buy it.

Mark , let me take that. I don't per se disagree with you. We're in a situation, we're analyzing what we're going to do with the cash. I won't make a comment on the value of the company. But I would say that most certainly is an alternative we'll be exploring. We have been in a blackout period self-imposed would be obviously the most knowledgeable person of what's going onto for month to month. So it's been a situation whether we wanted to or not we could not have purchased stock. But again because of our cash position we most certainly will look at a lot of different opportunities and do what we think is best for the company and the shareholders relating to the cash.

Thank you.

The next question comes from Adam Shoal.

Yes, can you expand about how you stand competitively and who you are facing in other areas other than retail?

In the banking financial institutions the processors, our primary competitors remain the same. A company called E-Funds out of Phoenix or Scottsdale. A company called Oasis (ph) which runs on Unix, and S-2 and a company called Mosaic out of South Africa. We're by far and away the biggest vendor in that space. What still remains the biggest user of our software competitors in-house systems of the top 500 banks some 40-plus percent of them still have in-house development solutions they support themselves primarily on the IBM mainframe. Part of our strategy with the Base24-es product is to offer a solution that can run on the HP as well as IBM, and UNIX with the Sun Solaris platforms and the other UNIX platforms as we see demand from our customers. So that gives us the ability to go after a whole other market space including those in-house systems to replace those as those customers bring those systems up for consideration.

That number was 40 percent?

Yes.

Thank you.

The next question comes from Scott Gesmala (ph).

A quick question regarding the backlog figure. Do you have a sense of what is under contract and further out than 12 months?

Well, it's all under contract. Beyond 12 months, we quantified that internally, but that's not a number were we historically released. We roll that every quarter for you so you have always not the next year out.

I'm assuming that's obviously based on estimates, because you have got the capacity upgrades in there so it does depend on whether your customer's volumes stay similar over time. Is that accurate?

Well, any capacity upgrades, for example a capacity upgrade that we would contract for in a future quarter, that is not in backlog yet that would be added to revenue in that particular quarter. But we don't have any estimation in our backlog of future capacity upgrades that customers may have down the road. There is nothing like that in backlog.

Capacity upgrades when we license them those are typically recognizable at that time. So they never show up in backlog, they are recognizable at the time.

I see. Then the other question was can you give us any sense of D&A? Depreciation and amortization.

We filed the Q. It was about 2.6 million for the quarter.

Great, thank you.

I would like to remind everyone, if you would like to ask a question, press star then the number one on your telephone keypad. The next question comes from Nick Moore.

I wanted to circle back on the newer products that were -- where you obviously couldn't record the revenue during the quarter. Without looking at the impact on the backlog could we get a little closer idea of the amount or the size of the deals maybe that were pushed out? Sorry to make a Ping-Pong ball out of that.

Some of these deals we haven't even publicized because we're working with the customers to gain their approval for press releases on them. A couple of these deals for the Base24-es product were quite sizable in the order of between larger than normal. They are larger than normal between 5-10 million dollars between the two of them, if you add them both together. When we get the opportunity to put them out in the press release you will see they are significant deals.

Little or none of that was recognized in Q1?

None of it was.

You did a bit more commerce in the quarter than the top line would indicate?

We had better sales than our top line would indicate but that that doesn't necessarily translate into recognizable revenue until we deliver these new products, get them in line for production.

You probably had some revenues that you can't record almost every quarter but was there much of that in the previous Q4 of fiscal '02? Was there a material amount of transactions like that?

Let me take that question. Under our new accounting guidelines we're looking at the revenue recognition policies but there was a decent amount of revenue to which we could not take that point in time, Nick.

I know most quarters there would be. I'm just trying to gauge the activity level of your customers.

It's been about the same for the past three or four quarters. It's been good, I wouldn't say stellar, but ok. In Q4, in terms of revenue recognition it wasn't just the fact that you sold new products. It's also with the new accounting standards or recognition rules that has changed some things and we have to adjust our business process to more fully understand them. I think what your question was, did you have a lot of new product sales in Q4 that you couldn't recognize and we had some Q1 we had an extraordinary large amount driven by those two deals I mentioned.

I'm just saying the activity of the sales force in bringing in business was more than you could recognize. I'm not arguing with the accounting standards you are working under. The sales force sounds like they had a good quarter for a slow period.

We had a good quarter in the U.S. Europe was slow and Asia Pacific was about as expected.

There are no further questions. Are there any closing remarks?

We thank you for participating in the call. And that concludes the call for today. Thanks again.