ACI Worldwide Inc (ACIW) 2003 Q3 法說會逐字稿

Good afternoon, my name is Matthew, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Transaction Systems Architects Incorporated 2003 third quarter financial results. [Operator Instructions] I would now like to turn the call over to Mr. Bill Hoelting, vice president investor relations. Mr. Hoelting, you may begin.

Thank you and good afternoon. The participants for TSA's third quarter financial results conference call are: Greg Derkacht, president and CEO. Dwight Hanson, senior vice president, Mark Vipond, president of ACI Worldwide and David Bankhead, CFO. This conference call could contain forward-looking statements pursuant to the Safe Harbor provision of section 21e of the securities exchange act of 1934. Actual results might differ materially from those projected in the forward-looking statements. Statements during the 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 forward-looking statements identified in our recent form 10-K and 10-Q filing. The agenda for the call will be as following: Dwight Hanson will provide an overview of TSA's Q3 financials. Mark Vipond will then discuss the highlights for ACI worldwide and Greg Derkacht will provide some closing comments, at which time we will open up the call to your questions. At this time, I would like to introduce Dwight Hanson.

Thanks, Bill and good afternoon. Today I will be discussing our fiscal 2003 third quarter financial results. First I will start by highlighting some key financial metrics that we achieved during the quarter. Total revenue was 73.8 million. Operating expenses were $69.1 million, which included a goodwill impairment charge of $9.3 million. Operating income was $4.7 million, with an operating margin of 6.3%. Net loss was $1.9 million and loss per share was 5 cents. Both of which reflect the goodwill impairment charge.

Operating cash flow was 11.5 million, our cash balance was $100.9 million, and our 12-month backlog was 225.9 million. 73.8 million of revenue is comprised of the following: Software license fees of 40.7 million, of which $18.9 million was initial license fees $21.8 million was monthly license fees. Maintenance revenue was $20.7 million and services revenue was $12.4 million. Revenues for each of our geographic channels were as follows: United States $31.9 million, Americas international $9 million, Europe and Italy and Africa $25.1 million and Asia Pacific $7.8 million. Revenues for each business unit were as follows: ACI $56.4 million, Insession $8.6 million, and IntraNet $8.8 million. Total revenues of 73.8 million represent an increase of 6.2%, that's compared to the third quarter of last year. Increases in license revenue, as well as maintenance revenue were the reasons for this increase in total revenues. The increase in license revenues is primarily due to the increase in capacity upgrades that the ACI business unit received during the third quarter and the early completion of certain contracts from fourth quarter backlog.

Increase in maintenance revenue reflects the quarter-over-quarter continued growth of our installed base of software products and the ACI and Insession business units. Operating expenses for the quarter were $69.1 million, which is an increase of 21.5%, as compared to the third quarter of last year. This increase is primarily due to a goodwill impairment charge of $9.3 million, which reflects the write-down of the last component of the goodwill associated with our messaging direct business. During the third quarter, we updated our assessment of the messaging direct business and concluded that due to the continued slow adoption of secure document delivery technology, it was appropriate to record this charge. All other expenses, other than G & A decreased quarter over quarter which reflects the impact of the expense, control, and reduction efforts that have taken place over the last 18 months. The increase in G & A expenses is due to increased professional fees and changes in bad debt expense. The bad debt expense for the third quarter of last year was a negative amount due to adjustments made to the allowance for doubtful accounts.

The tax provision of $6.3 million was computed using a 46% effective rate for the third quarter on all items except the goodwill impairment charge which is a non-deductible item for tax purposes. The corresponding effective rate for the year has been reduced to 52% as a result of a number of tax planning strategies that were deployed during the third quarter. We continue to implement additional tax planning strategies in an attempt to further reduce our overall effective tax rate. Generated positive operating cash flow of $11.5 million, and our cash balance at the end of the quarter was $100.9 million. Our ending backlog was $225.9 million, which is comprised of recurring backlog of $164.3 million, and non-recurring backlog of $61.6 million. The recurring components are monthly license fees of $80.4 million, maintenance fees of $79 million and facilities management fees of $4.9 million. The non-recurring components are license fees of $38.7 million and services of $22.9 million. We included backlog all revenue specified and signed agreements to the extent we believe that recognition of the related revenue will occur within 12 months. Thanks for your time this afternoon. I will now turn the call over to Mark for his comments on the ACI business unit.

Thank you, Dwight. Good afternoon, everyone. I'm hear to give you an update on third quarter results for ACI Worldwide. ACI's revenue for the quarter was $56.4 million. Despite the challenging economic conditions that remain throughout the world, ACI was able to sign new business during the quarter. Some of the highlights include system and capacity upgrades over $100,000 at 14 customers. These upgrades took place in all of our geographic regions with several significant contracts in our European operation. These upgrades are an essential element of ACI's business. We expect customers will continue to license additional capacity over time, but it is difficult to predict the timing of these events.

The number of capacity upgrades in the third quarter was greater than we have received in the past few quarters and contributed to our increased revenues. ACI licensed product to 13 new customers in the quarter. Those products included six BASE24, one NET24, three proactive risk manager, two winBASE24 and one large U.S. bank, BB & T corporation which we announced yesterday that licensed our base 24 ES solution to run their ATM network and IBM z series server technology. While BB & T is already a customer of TSA due to it's use of internet MTS product, it is a new customer for ACI and represents a significant win for our company. We are pleased with the number of new ACI customers in the quarter. We believe-- which we believe illustrates the value our products provide and the long-term strength of our company. ACI licensed seven new applications to existing customers during the quarter. These include licenses of our BASE24 ES enhanced authorization system, mobile topup, automated key distribution system, proactive risk manager and new BASE24 add-on products. With the ACI commerce framework and our continued investment in multi platforms and integrated payment systems we believe we are well positioned in our market space. Our investment in BASE24 ES and our strategy to evolve our market leading BASE24 product to this new technology have been well received, in addition the BASE24 ES multi-platform solution is generating interest in new markets where we believe we can license more new customers over time. Thanks for your continued interest. I will now introduce Greg Derkacht.

Thank you, Mark. In summary, during the quarter we were able to increase our revenue, grow our cash position to over $100 million. As was noted our operating results were negatively impacted by a non-tax deductible goodwill impairment charge of $9.3 million relating to 2001 acquisitions of messaging direct. Messaging direct secure document delivery technology is currently within the ACI Worldwide business unit and has experienced slow adoption rates. Going forward our plan is to focus on our growth initiatives and continue to manage our costs. As you can see, we've made progress on our effective tax rate but we still have work to do on this particular issue.

We will continue to implement additional tax planning strategies and we believe that by the end of the fiscal year, we will again be in a position to provide revenue and earning guidance. Two weeks ago, we announced the appointment of David Bankhead as the company's new Chief Financial Officer. We are extremely pleased to have Dave join our team. He comes to us with over 30 years of financial experience, has been a CFO in four other public companies. The search to fill this position was quite extensive and ultimately Dave's background, including his international track record made him the right choice. Dave is going to say a few words of introduction today and plans on fully participating in next quarter's conference call. Thank you very much for your continued interest in TSA.

This is Dave Bankhead. Thanks, Greg for the kind words. I am pleased to be joining the management team. TSA's history of success and innovation in the electronic containment space made this a very easy decision for me. I believe the company is well positioned to continue to lead in this market, and I look forward to contributing to that effort. Thank you for your interest in TSA and I look forward to working with you in the future. Now I'll turn the call back over to BIll.

Thank you. Operator at this time we'd like to open up the call to the questions.

Certainly. [Operator instructions] And your first question is from Franco Turrinelli with William Blair.

Good afternoon gentlemen, how are you?

Hi, Franco.

Very impressive quarter from the point of view of the number of customer additions and the capacity upgrades, is this the light at the end of the tunnel that we've all been waiting for or is this some fortuitous timing?

Franco, I would let Mark talk to it also. To characterize the environment it really has not changed significantly. The sales cycle delays are still very, very, significant and difficult. It was a good quarter. We're proud of the results but we have not seen anything change significantly internationally within the U.S., that really signals a change.

This is Mark, Franco, boy, you ask the same question every time! From the capacity upgrades we're obviously very pleased with the results in the quarter. But that's -- as I said, in my comments it's a bit unpredictable. Sometimes you run into customers that run in--eclipse their capacity volumes and sometimes you don't so that one's a bit unpredictable relative to new customers yeah we also were very excited about the number of new customers. A lot of the BASE24, as I said six new BASE24 customers, we're very excited about BB & T. Did it change anything? We are just still plugging away out in the marketplace and I think we got some good traction and got some good results but it-- I don't think the market has materially changed but we are confident that our strategy is a good one for us to attract new customers over time. Maybe we saw something like that this quarter but I don't know that we can sit there and say it will be that way every quarter going forward.

Okay, I will try to come up with some different questions for you. [ LAUGHTER ] Hey you guys always use the same script, why shouldn't I? [ LAUGHTER ]

Oh, come on!

One question, though, for you. The customers, as you point out, great roster, great -- you know, good diversification against different products as well. My guess is that most of these customers are reasonably significant and probably did not contribute very much to revenue in the quarter but are contributing to that nice backlog that we're seeing right now.

Hi, this is Mark again. Yes that's absolutely true. Many of our products -- the newer products that we have, the BASE24 ES and our additions of PRM and our payments manager because of the revenue recognition rules they are delayed in terms of when you can recognize them. They either have to be accepted. There's different criteria when they can be recognized. The only things that we can actually recognize and have confidence in recognizing in a given quarter that we sell are capacity upgrades and, you know, pots and pans, little add-ons to our existing BASE24 customers in the ACI business. So there's a little that we can influence or recognize in a given quarter. Most of it goes in the backlog for sales.

One final question if I may before handing it back to the others on the call, I realize that you don't feel comfortable providing guidance; however, in the past we have often seen the September quarter be a pretty strong quarter for you. What's your thinking, just kind of heading into this final quarter in terms of customers? Budgetary capacity and in terms of their plans? Any visibility to that? You know, at all that you can share with us?

My answer to that would be it's -- the demand level is about the same as it's been for a while. Yeah, we usually have -- this is the end of our fiscal year and so naturally our salespeople are a little bit more aggressive in trying to get to their numbers that you may have some uptick for that, but I think the demand level in the marketplace is about the same as we saw this quarter and the last quarter. I don't think it's materially changed.

Okay. Thanks. And let me not hand over without a, welcoming David and, b, thanking Dwight for his service.

Thanks, Franco.

Your next question is from Kevin McClellan with BDS investment.

Hi, Kevin McLaughlin BDF. In previous conference calls, Greg, you mentioned that the board had given you directions to create a corporate strategy and I think it was relative to the potential for mergers and acquisitions. I was wondering about the market condition and the attractiveness of those types of opportunities and the company's intentions, please.

Well, let me say the intentions as far as we're concerned at this time, are still the same. We are literally still in the process of finalization of strategy basically and the directions from the board, should -- within the September time frame we have a strategy basically solidly in place. I think at that point in time, we would be well served to discuss and have an opportunity to discuss our strategy with various people, including the street. So, you know, we're very, very, close at this point in time. We're also going through a strategy validation process with an outside firm to assist us in that process. So I think we're getting very, very close.

Okay. Thank you very much.

Excuse me.

No, I will let you finish.

Yeah, I think the opportunity levels out there are still significant. And we'll be finished with the process here fairly soon.

All right, thank you very much. Thanks to Dwight and welcome to David.

Thank you, Kevin.

Once again, ladies and gentlemen, I would like to remind you, if you have a question, please press star, and then one on your telephone keypad. And your next question is from Ned Davis with Taconick.

Good afternoon, gentlemen. And also great performance it looks like. And welcome David. I have a couple of questions. One, the balance sheet, would you describe the situation as sort of somewhat normalized now with respect to receivables, payables, et cetera? I know that there was a big effort to kind of improve liquidity back a couple of quarters. Is it sort of stabilized, now can we expect these ratios to remain roughly where they are and then I have one other question after that?

I would say we feel our balance sheet is stabilized at the present time and hopefully we can have good continued performance on. Cash and things like that but we do feel stabilized.

Okay. Second question has to do with some of the new contracts and let me particularly reference the BB & T transaction. I take it that's a relatively large transaction but over a period of years from a revenue standpoint?

Well, as of most of our contracts, that one specifically, but generally we sign a five-year agreement, and the price [INAUDIBLE] are recognized over five years.

So is it -- are they replacing a legacy from another vendor or an in-house legacy? And is this something you think you can -- if you will, copy with other large players either here or overseas?

So the answer to the question on BB & T, yes they are replacing a legacy system from a vendor that has discontinued support on the IBM Z series and so we are taking over that application. And can we replicate it, yeah, we believe we can. The specific application that we're replacing is typically not installed in such a large organization. It's usually been geared towards smaller organizations with anywhere from 50 to 100 ATMs in their network and BB & T has somewhere approaching 2,000. So I don't know that replacing that specific application is that replicateable because there's not that many of them that have that big system on that antiquated piece of software but obviously one of our strategies relative to thriving is to go after the in-house and the other solutions that run on these platforms that may not have stayed up to snuff with investments and mandates, the technology that we can eclipse them with our product, and also provide additional functionality. That's certainly part of our strategy is to build our market share with our ES product.

One last detail, I wonder if I can get a clarification. The tax rate effectively was 46% with no impact from the Goodwill impairment charge but I--somewhere else it says 52% rate for the year, so are you in effect providing a tax rate guidance for the full year at 52%? Is that -- did I understand that correctly?

Well, the way the product works is you estimate what your rate is for the year and then you apply that to your year-to-date results. And then you push out the difference within the current quarter.

Okay.

So at this point, that's -- that's our best estimate of the rate, based on the facts that we know today, because that's how you do it.

That's for the full year '03 fiscal, the 52%?

That's correct.

That's right.

Okay. So we could--whatever estimate we want to use for the fourth quarter we could then deduce what the tax rate would be, based on using that 52%? That's kind of what you're saying?

As long as you apply that to the full-year numbers, right.

Right. Okay.

Exclusive of that goodwill charge.

Is the 46% rate for this quarter a fluke or is it something that particularly with David working on this, might signal that your tax rate will start pushing towards the normal corporate rate next year.

Well, we most certainly have the project continuing at this point in time and we'll continue to hopefully apply strategies will which continue to reduce the rate. So very much the intent is to continue this process of reducing the effective tax rate but obviously we're working with the taxing authorities is a long-term process and we hope to be able to do it, but at this point in time I make no guarantees of that.

Okay, thank you.

Your next question he is from Nick Sisken with [INAUDIBLE].

Hi, a question on the increase in G & A. Dwight you said--you gave a couple reasons why and I wanted to hear those again and then, b, can you give us some more detail on the increase in the bad debt expense, please.

Well, like I said the increase is primarily due to increased professional fees that we incurred this year as compared to the third quarter of last year, and the bad debt expense that we're -- that we have in the third quarter of this year, when you compare it against the third quarter of last year, it was actually a negative bad debt expense because we adjusted our overall bad debt allowance. So it's more of a function of an abnormal amount a year ago than it is an unusual amount in the current quarter for this year, Nick. It's -- it's really a function of that. And that's what I was trying to convey in my remarks earlier.

Now the increased professional fees and ongoing expense, is G & A going to be the same level on a go-forward basis?

Let me come out on that, Nick. Basically the G & A, the increase is related to the tax project that's going on and so at least for one more quarter we'll see that continue. So at this point in time, I think the G. & A will be running somewhat at that level for at least the next quarter.

Okay. Thanks and congrats on the progress.

Thank you.

And you have a follow-up from Franco Turrinelli with William Blair.

I think you answered my question but just to confirm, there was a step up sequentially in the G & A from the first quarter and I'm assuming that that is related to the tax project you just talked about?

Yes.

Okay. Thanks.

And at this time there are no further questions. Do you have any closing remarks?

We thank you all for participating in our Q3 conference call and look forward to next conference call. Thank you for attending today.

Thank you very much.

This concludes today's teleconference. You may now disconnect.