ACI Worldwide Inc (ACIW) 2003 Q2 法說會逐字稿

Good afternoon. My name is Mitch, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Transaction Systems Architects Incorporated second quarter financial results conference. 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 that time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press star then the number two. Thank you, I would now like to turn the call over to your host for the afternoon Bill Hoelting, Vice President of Investor Relations. Mr. Hoelting, please begin.

Thank you and good afternoon. Participants for TSA's second quarter earnings conference call are Greg Derkacht, President and CEO; Dwight Hanson, CFO; Mark Vipond, President of ACI Worldwide. This conference call could constitute forward-looking statements pursuant to the Safe Harbor provisions of section 21-E of the Securities Exchange Act of 1934. Actual results might 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.

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 Form 10-K filed on January 13, 2003 and our Form 10-Q filed on February 13, 2003. The agenda for the call will be as follows: Mark Vipond will discuss the Q2 highlights for ACI Worldwide. Dwight Hanson will then discuss the Q2 financials; Greg Derkacht will provide his closing comments at which time, we'll open up the call to your question. At this time, I would like to introduce Mark Vipond.

Thank you Bill. Good afternoon everyone. I'm here to give you an update on the second quarter results for ACI Worldwide. ACI's revenue for the quarter was $48.7m. 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 over $100,000 at nine customers. These upgrades took place in all of our geographic regions. While our customers continue to see transaction volume's increase, their desire to control their spending has caused them to own the licensed capacity that's absolutely necessary. ACI licensed five new customers in the quarter, this included one BASE 24, one Net 24, two proactive risk manager, and one large customer who licensed our new BASE 24-es solution on Unix Server technology. We continue to see interest in our multi-platform payment solutions. ACI licensed 10 new applications to existing clients during the quarter.

This includes sales of our automatic key distribution system, smart chip manager, Proactive Risk Manager, Payments Manager, Commerce Gateway and New Base 24 add-on products. With Asia e-commerce framework and our continued investment in multi platform integrated payment systems. We believe we are well positioned in our market space. Our payment agent strategy to evolve our base 24 solutions to our base 24 ES technology it is being well received by our customers. In addition the base 24 ES multi platform solution is generating interest in new markets while we believe we can drive increased market share over time. Thank you for your continued interests. And now I will introduce Dwight Hanson to give the TSAI financial update.

Thanks Mark and good afternoon. Today I will discuss the fiscal 2003 second quarter financial results. First I will start by highlighting the key financial metric that we achieved during the quarter. Total revenue was $69.3m, operating expenses were $58m, operating income was $11.3m with an operating margin of 16.3%. Net income was $4.1m and an earnings per share was $0.11. Our operating cash flow was $9.3m. Our cash balance was $91.4m and 12 months backlog was $233.1m. The $69.3m of revenue is comprised of the following: Software license fees of $38.2m of which $16.3m was initial license fees and $21.9m was monthly license fees. Maintenance revenue was $19.5m and services revenue was $11.6m.

Revenues for each of geographic channel will follow. United States $28m, America's International $8.1m, Europe Middle East and Africa $25m, and Asia-Pacific $8.2m. Revenue for each business units were as follows: ACI $48.7m, in session $8.8m, and Internet $11.8m. Total revenues of $69.3m represent the decrease of 2.8% as compared to the second quarter of last year. And an increase of 10.8% as compared to the first quarter of this year. Year-over-year decrease was in our software license fee and services revenue, which is consistent with the trend that took place in the first quarter of this year. In addition $821,000 or 1.2% was due to the sale of Regency Systems, which took place in the second quarter of fiscal 2002. Year-over-year decline in license fees was primarily due to shift in sales focus. ACI's newer products such as Base 24EF are payment management products.

This shift would generally result in a difference in timing of revenue recognition as revenue from these newer product is typically not recognized until customers put the product into production, whereas revenue from ACI as a more established product is typically recognized upon delivery of the products to the customer. In addition, revenue from capacity upgrades decreased year-over-year. Capacity upgrades are typically recognized of all as revenue in the quarter in which they are sold. Offsetting the decline caused by the shift in sales focus of ACI's products and a general effect of the global economic conditions was an increase in Internet license fees. This increase is due to the completion of the final phase of a large international ACH (ph) project, which allowed us to recognize approximately $3.6m of revenue. Most of the license fees reflected year-over-year growth of 4.1% and sequential growth of 9.2%. These increases are the results of the growth of our installed base of customers as well as the impact of a number of contracts in which initial license fees for revenue recognition purposes are being recognized over the contract term. The year-over-year decrease in services revenue continued the trend we experienced last year in the first quarter of this year. As I mentioned last quarter, customers are using lower cost service providers or in-house resources to fulfill their consulting and support needs. In addition, our newer products such as Base 24EF are architected in such a manner that there will be less of a need for associated services work as compared to the classic version of our Base 24 product. Operating expenses for the quarter were $58m, which is a decrease of 5.8% as compared to the second quarter of last year. This decline is primarily due to a reduction in our software amortization of $2.2m, which is due to some items becoming fully amortized over the course of the last 12 months, as well as the impact of reduced staffing costs due to fewer employees this year as compared to last year. With 1,600 employees this year as compared to 1,800 last year. In addition, approximately $900,000 of expense is due to the decrease -- of the decreases due to the sale of Regency.

Our sequential basis total operating expenses increased 5.4%, which is primarily due to re-audit professional fees of $1.6m associated with the completion of the re-audit, as well as approximately $900,000 of additional payroll taxes due to the restart of the payroll here on January 1. On a pre-tax basis, our profit was $10.9m. Our effective tax rate for the quarter was 62.5%, which reflects the true up of our year-to-date tax accrual. Our year-to-date effective tax rate is 57.3%. The effective rate is impacted significantly by operating losses in terms, in certain forms subsidiary. These losses can be utilized in other tax paying subsidiaries and not have negative impact on our tax situation. We are currently analyzing alternatives that are focused reducing our overall effective tax rate. Net of taxes our profit was $4.1m, which resulted in earnings per share of $0.11 for the second quarter. This compares to earnings per share of $0.19 in the second quarter of last year.

Last year's second quarter results included a gain of $8.3m from the sale of Regency Systems. From a cash flow perspective we generated positive operating cash flow of $9.3m, and our cash balance at the end of the quarter was $91.4m. Earning backlog was $233.1m, which is comprised of recurring backlog of $162.4m, and nonrecurring backlog of $70.7m. The recurring components are monthly license fees of $81.2m, maintenance fees of $76.3m and facilities management fees of $4.9m. The nonrecurring components are license fees of $44.5m, and services of $26.2m. We included in backlog all revenues testified and signed agreements to the extent we believe that recognition of the related revenue will occur within 12 months. From a balance sheet perspective, the only other area that I'd like to comment on today is the balance of our goodwill.

As you know, we no longer amortize goodwill, but are required to perform periodic assessments of the carrying value of this asset. Majority of our goodwill balance is associated with the core ACI business. There is a component of goodwill that is associated with the message indirect business. Message indirect core product is a secured document delivery software product. IT spending in this are continues to be weak and the adoption rate for this technology are slower than expected. We will continue to closely monitor activity of this product and the related carrying value of the message indirect goodwill. Thanks for your time this afternoon; I'll now turn the call over to Greg from some closing comments.

Thank you Dwight and good afternoon. Overall we held our own on a difficult business environment. Results from geographic channels for mix, with Asia/Pacific being affected by a slowing economy, and the SARS epidemic. In Europe, also experiencing difficult business conditions. Like other software companies in our sector, we are not forecasting a rebound in the financial services sector in the near-term. With these business conditions, our plan has been to one - focus on managing our cost, and two - continue to invest in our new initiatives, which we believe enhance our current leadership position and e-payments marketplace. As a remainder our new initiatives are ACI's multiplatform solution BASE24- es, ACI Proactive Risk Manager, a credit and debit card slot solutions, ACI's backoffice solution, payment manager that enable planning institutions to move away from manual back office systems to automated systems. To date, we assign six Base24-es customers. We continue making progress on the implementation of our previously license these projects.

In addition, I am pleased to announce that we recently signed our 50th Proactive Risk Manager customer. We continued to make progress on our business model analysis that has helped to be in a position to provide revenue and earnings guidance at this point in time. Unfortunately, we still have some more in front of us regarding the review of our tax situation. As we complete our analysis, we will be in a position to once again provide revenue and earning guidance. I feel good that our multiplatforms solutions attracting continued interest in the marketplace. We continued to look for additional sales opportunities particularly from our newer initiatives PRM Proactive Risk manager and payments manager. And just a quick note about our other business units. Sessions continues to fill and niche in providing infrastructure tools to multiple verticals and Internet continues to convert existing customer base to its money transfer system of the IAX (ph) platform. At this point in time thank you for your continued interest in TSA. I would like to turn it over for open questions. Thank you.

Ladies and gentleman, once again I would like to remind everyone, in order to ask a question please press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Franco Turrinelli with William Blair & Co.

Gentleman good afternoon. A couple of questions for you. I think primarily for Mark, Mark you commented on the fact that volumes do continue to increase at your customers, do you get any sense that we are kind of getting to the end of the spare capacity of those guys might have and that will start to see a little bit of a pick up in capacity up grade activity?

All right, Franco I think it is going to change materially. We continued to have up grades as the volumes increased the thing that is probably been different in the last year, has been typically when you have those conversations fine as they will sometimes forecast out their growth the next few years and try to work out a capacity upgrade that can contemplate those kind of volumes, what we are seeing now more than anything else is one is due in the next six months or twelve months. I don't really want to spend anymore money than I absolutely have to, so we don't give into a lot of conversations and well in terms of growth projections in most of our clients right now, because they are hoarding the money just as everybody else has in this environment, but I will think we see a material change relative to volume growth, I don't anticipate that somehow the log [inaudible]game is going to free up until the economic situation improves

Mark, does it make any difference, though, to you ultimately if a customer does one big capacity upgrade or four smaller ones over two years or over that one?

No, it just means you don't get the class upgrade now versus over the next two years. Typically, if they are willing to, if they want to discuss getting their capacity for the next couple of years now, you do without a discount, right, because you get your money upfront. So, no ultimately, over the long term of the business, it doesn't matter.

Okay, good. And then, it seems as though Internet sort of had a one-time increase in the revenue to the completion of that large singe project. So, should we still be thinking about Internet as a kind of $8.5m sort of business, excluding that item? Did I understand Dwight's disclosure correctly?

Yeah, the Internet revenue that I talked about was $11.8m. And that included that large HDH project. That, in effect, was a one-time item. Obviously, there's a lot of projects going on in that business, but it's an item that kicked off a lot of revenue in the current quarter at an unusually higher rate in comparison with their other projects Frank.

Good, and do I, I realize that this may be difficult, but should we think of the go forward tax rate as being somewhere in that year-to-date number that you gave us?

The best data we have now is what you see on the year-to-date basis. Obviously, like I said, we are studying that, but if all any changes are made, that's the rate that's in.

Okay, great. Thank you very much.

Thank you Franco.

Your next question comes from the line of James Armstrong with Henri Armstrong Associates.

Hello gentlemen.

Good afternoon.

Hello James.

Just sort of a broad question for Mark and Greg, I guess. Given the near-term visibility is poor and mainly very sluggish, maybe you could talk some moments about what you might be see in the long term, say 2-4 years out? Do you see, a couple of big growth opportunities you talked about in the past are number one, things which have in-house systems gradually converting to TSAI product, and do you think that will continue to happen, and what of course is the driver? And then, number two, extending the product family horizontally using other hybrid platforms that you have, you see that as a bigger or a smaller growth opportunity than the former? And which one is going to happen sooner, do you think?

I would say, this is Mark, I would say they are related. In terms of longer term, yes, we do believe the in-house solution builds continuity pressure on the cost associated with them. There is a suitable economic benefit using bended (ph) solution as long as they can support the flexibility and the function the customers require. I think, over the last ten years, we have seen the number of a percentage of in-house solutions decrease and we will continue to see that trend going forward. What will be the catalyst for that? It's the same thing that have been the catalyst in the last decade. It's mandated changes like Triple DES, our smart card support, EMV support. These things that cost a lot of money to maintain these systems cause those customers rather than have solutions in order to support their currency, or at current, support the environments they have to make those investments, and we make them can spread that cost over our huge customer base and it makes us more cost effective. So, we expect in-house solutions will continue to be come up a bit as time goes along. We see a systems of systems are already up a bit. We also believe there will be some replacement systems for systems that are outdated or have not kept up or the companies have gone out of business.

Well, to the other platform issues, our view on this is with our basically four-year (ph) strategy in the multi-platform solution, it does allow us to go after markets that we couldn't go before. I mean before we had a HPNSK (ph) only based solution with BASE24. It's still a very viable platform, but Unix, IBM, other platforms, there are certain customers who only deploy certain type of server technology. And already, we've ones in new business, based upon the fact that we've offerings that run on Unix as well as the IBM mainframe. And to some extent back to the in-house environment, if they run on IBM today in the in-house they typically want to stay in that technology with their new system, up-ended (ph) solutions. So, there is - our long-term view is quite bullish. We believe we are well positioned with the R&D and the solutions that we have. As pending increases, we believe we will get our fair share that's pending within the marketplace.

May I ask you a follow-on question?

Sure.

If, given that we are in the sort of a grinded out type of period let's say in the next year or two and it sounds like you folks have rided (ph) the ship and people are pulling in the right direction. Greg, what could be done to harvest value for the stockholders in this environment over the next couple of years you think?

Well, the best way to kind of express that is I think we need to keep on basically investing in our new initiatives, our new product lines which we think, as the economy turns it is going to help, basically grow the top line of the organization. As I said before, I think there is other fuel for the fire basically, and I will call it very synergistic acquisitions, which I think now that we will exit, have turned the corner a little bit that at some point of time we need to start looking at the opportunities out in the marketplace’s I think there are several growth initiatives, which could help the organization. But I would say right now, we are going to be very, very careful. We used [Inaudible] and making sure we make expenditures very judiciously to grow the organization. But as you said it's is just the tough economy, I think it has kind of a slugged out right now, but I think there are some opportunities out there.

Okay, thank you.

Thank you.

Once again ladies and gentlemen, I would like to remind everyone, if you do have a question, please press star then the number one on your telephone key pad. Your next question comes from the line of Brad McKause with Smith Hayes.

Just a couple of quick questions here. Do I, - on the - in the balance sheet, I noticed billed receivables and accrued receivables. When did you cease that doing receivables? Would that have been in the current quarter or previous quarter?

Now factoring isn't part of the receivable base. We haven't done any factoring in over a year or so. The only impact of factoring is there's a line item called deferred financing on the liability side and you will notice that - that's been slowly going down as we've collected from customers and remitted those money on to the factor. It really doesn't impact the receivables.

And that runs off in - another two quarters possibly then at that rate?

No, it's a little bit longer than that. It goes out over the couple two to three years.

Okay and then one question for Mark. You mentioned that US based card processor that bought BASE24 in the quarter. Was that on Tandem architecture or something else?

Actually Brought, they're licensed BASE24-es on unit growth. It's on Solaris to be specific.

And that would have been your first processor on a non-Tandem architecture?

No, that's not correct. Some of the other that Greg referred to six BASE24-es client. Three of those had been on the Internet HP and SGate (ph) platforms, two on Sun Solaris and one on IBM AIX.

Okay. Great thank you very much.

Your next question comes from the line of William Tappard with Tasino Advisory Group.

Greg?

Yes.

Hi! It's Bill. Congratulations on the new contracts on the B24-ES (ph) system. It sounds like you did two in the previous quarter and had four new contracts this quarter. Is that correct?

Actually, this is Mark Vipond. It's not. One of them was actually dined over a year ago.

But you announced two in the...

Yeah, we just visit, spread our time to sixes accumulation of deals that we sign over the last year in various quarters. So before we sign ...

So, in this last quarter you signed how many I'm sorry?

We signed two last quarter.

Can you give us order of magnitude, what kind of size they were? I think you said that two in the quarter before that's where a combination of nearly $10m, enlargement?

Well, you have a good memory. Actually we said last quarter. Yeah there were two very large ones. The one we signed this quarter was not quite that large but pretty significant.

Terrific.

How is that's for being pretty [Inaudible] .

I thought you had two in this last quarter.

No we had one BASE24 ES.

Okay, great. Thanks so much.

Your next question comes from the line of Joan Quinnin with Cachton Associates.

Real simple question here. You guys just talked about the balance sheet and holding cash, your competitors and people managed to do that and then you talked about at some point you are going to have to look at deploying some of that cash, maybe some incremental to that to look at acquisitions. Just any thoughts on actually deploying that cash buyback some stock, clearance some of your own stock in the near term?

Yes. I think it's before - I think I am - we are going to process a review with board strategic utilization of cash for your plan -- for the organization etc. So, that should be completed on relatively short period of time. At that point in time, we are going to look at alternatives and that would be absolutely one of the options we will look at. I am saying that - I am not saying we are going to do it, but it surely be an option we would review.

If that's possible, we will get an answer then shortly?

I would say over the next several months.

Thank you.

Again, ladies and gentlemen, if you would like to ask a question, please press star then the number one on your telephone keypad. Your next question comes from the line of Joshua Fenten with Gabriel Asset Management.

Hi, good afternoon. In your 10Qs you break out initial license fee revenue, monthly license fee revenue. Can you do that for this quarter?

Sure. I think I provided that....

I got on about 10 minutes late.

Commentary, the monthly license fee revenue was $21.9m; initial license fee is $16.3m.

Thank you.

Your next question comes from the line of James Armstrong with Henry Armstrong Associates.

I know that you don't want to give guidance and forgive me if I am asking to you, but since it's a broad question. Is the current operating cash flow run rate, does it seem reasonably stable obviously during the re-audit a lot of, several parts were moved around and it's important for us to get a handle on what the company is true look forward run rate is. So, question no. 1 is, does the current operating cash flow of $9.3m per quarter, a reasonable guesstimate at what the company can do? And then question number 2 is can we expect the cash balance to keep rising quarter by quarter.

The cash balance of this organization and the free cash flow is still bit hard to track, existent track as you typically expect in an organization, but the very much the intent is to have free operating cash flow over some period of time with the organization. That's our responsibility to keep the company profitable and watch CAPEX, etc, etc. So, I can't say we are going to leave this is 9.3 is the cash flow on a quarterly basis sort of that's what it will be, but we obviously, absolutely intend on keeping positive cash flow in the organization.

Which would then lead us to a rising cash balance abstinent, (ph) this is to deploy it in acquisition or buyback.

Due to the interest (ph) paid debt for some period of time.

Right, thank you.

Gentlemen, at this time, there are no additional questions. Do you have any closing remarks?

We thank everyone for your questions and attendance. This concludes our Q2 conference call. Thank you.

Thank you very much.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, you may now disconnect.