ACI Worldwide Inc (ACIW) 2003 Q4 法說會逐字稿

Good evening. My name is Corey, and I will be your conference facilitator. At this time, I would like to welcome everyone to the TSA 2003 fourth-quarter and fiscal year-end, financial results conference call. At this time, I would like to turn the conference over to Mr. Bill Hoelting, Vice President of Investor Relations. Mr. Hoelting?

Thank you, and good afternoon. The participants for TSA's fourth-quarter earnings conference call are Greg Derkacht, President and CEO, David Bankhead, Chief Financial Officer, Mark Vipond, President of ACI Worldwide.

This conference call could contain 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 press releases and form 10-K and 10-Q filings.

The agenda for the call will be as follows. David Bankhead will discuss the Q4 financials, Mark Vipond will then discuss the Q4 highlights or ACI Worldwide and Greg Derkacht will then provide some closing comments, at which time, we will open up the call to your questions.

At this time, I would like to introduce David Bankhead, CFO of TSA.

Thanks, Bill, and good afternoon. Today, I will be discussing our fiscal 2003 financial results. I will start by highlighting some key milestones that we achieved during quarter. Total revenue was $71.8 million. Operating expenses were $59.9 million. Operating income was $11.9 million with an operating margin of 16.5 percent. Net income was $9.1 million and diluted earnings per share were 25 cents.

Operating cash flow was approximately $11.6 million. Our cash balance at year-end was $114.0 million. Our twelve-month backlog was $232.8 million. The $71.8 million of revenue is comprised of the following -- software license fees of $36.6 million, $20.5 million of maintenance revenue, and $14.7 million of services revenue. The license fee revenue of $36.6 million was comprised of $15.2 million in initial license fees and $21.4 million of monthly license fees.

Revenues for each of the geographic channels were as follows. United States -- $30.8 million, Americas, International -- $10.1 million, Europe, Middle East and Africa -- $21.7 million, and Asia-Pacific -- $9.2 million. Revenues for the three business units were as follows. ACI -- $55.8 million, Insession -- $8.7 million, and IntraNet -- $7.3 million.

Operating expenses for the quarter were $59.9 million, which is a decrease of 5.1 percent from those reflected in the fourth quarter of last fiscal year. The decrease is primarily due to decreases in bad-debt expense and professional fees offset by an increase in business-insurance expense. During the fourth quarter, we also incurred $2 million of restructuring costs associated with staff reductions in two of our business units.

As a result of our ongoing tax-planning initiative, we have reduced our effective tax rate to 57.4 percent for the year. This rate includes a non-deductible goodwill impairment charge of $9.3 million, related to the 2001 acquisition of MessagingDirect Ltd. Formal revenue for the year was $277.3 million.

Operating expenses were $242 million. Operating income was $35.3 million, with an operating margin of 12.7 percent. Net income was $14.3 million and diluted earnings per share were 40 cents. Operating cash flow for the year was approximately $37.6 million, again resulting in a year-end cash balance of $114 million.

Our ending backlog was $232.8 million, which is comprised of recurring backlog of $167.1 million and non-recurring backlog of $65.7 million. The recurring components are monthly license fees of $77.7 million, maintenance fees of $80.6 million and facilities management fees of $8.8 million. Non-recurring components are license fees of $44.8 million and services of $20.9 million. We include in backlog all revenues specified and signed agreements to the extent we believe at this time that recognition of the related revenue will occur within the next twelve months.

Thank you for your time this afternoon. I will now turn your call over to Mark Vipond for his comments on the ACI business unit.

Thank you, Dave. Good afternoon, everyone. I am here to give you an update on the fourth-quarter results for ACI worldwide. ACI's revenue for the quarter was $55.8 million. ACI had good sales results, and we signed a number of new contracts during the quarter. Some of the highlights include system and capacity upgrades over $100,000 at 12 customers. These upgrades took place in all of our geographical regions, with some of our largest bank customers.

For fiscal year '03, ACI had 47 capacity upgrades over $100,000. ACI licensed products to 13 new customers in the quarter. Those products included four BASE24, one NET24, two Proactive Risk Manager, five WINPAY24 and one BASE24-es license. We're pleased with this level of new customer signings, and it brings our total number of new customers in fiscal year '03 to 38. We believe our focus on winning market share with our multi-platform, payment solution is reflected in these results.

ACI licensed 14 new applications to existing customers during the quarter. These include licensees of our BASE24-es, BASE24-es Enhanced Authorization System, Mobile Pop-up, Commerce Gateway, Automated Key Distribution System, Proactive Risk Manager, and new BASE24 add-on products. For fiscal year '03, ACI licensed 46 new applications to existing customers.

With the ACI commerce framework and our continued investment in multi-platform, integrated payment solutions, we believe we are well-positioned in our market space. We recently had our first customer operating on a Sun Solaris platform move into production with our new BASE24-es product. Our investments in BASE24-es and our strategy to evolve our market leading BASE24 products to this new technology, continues to be well-received by our customers. We believe our investments in this product line, as well as our investments in other products included within our ACI commerce framework, will position us to win more business as market conditions improve throughout the world.

Thanks for your continued interest, and I will now introduce Greg Derkacht.

Thank you, Mark. We appreciate your attendance today and your interest in TSA. During the fourth quarter, we added 25 new customers. With the fourth quarter's activity, TSA total customer count is approximately 740, running more than 1700 products in 73 countries. Also, this quarter we expanded our customer relationship with a number of our existing customers, providing them additional software and services.

As mentioned, we generated $11.9 million in operating income for the quarter, as our three business units, ACI Worldwide, Insession Technologies and IntraNet continue to effectively manage their businesses. This quarter's operating expense did include $2 million restructuring charge associated with staff reductions. As a result of our ongoing tax-planning initiative, we have reduced our effective tax rate for the fiscal year. With our fiscal year in close, we have completed our planning process for next year. And we are in position at this time to provide revenue and earnings guidance for fiscal 2004.

As you know, from past financial results, our business is difficult to project on a quarterly basis due to the nature of large software projects and capacity upgrades. With these characteristics, we feel the best guidance we can provide is annual revenue and annual EPS. So based on our business model, and an assumed, 43-percent, effective tax rate, our annual revenue guidance for 2004 is 266 million to 287 million and our EPS guidance is 60 cents to 72 cents.

We will continue to invest our newer initiatives. For ACI Worldwide, these initiatives include BASE24-es, PRM --Proactive Risk Manager -- and Payments Manager. We are pleased with the progress of these new initiatives to date. ACI's most significant new project initiative is BASE24-es, a open system, multi-platform solution. As a reminder, we rolled out BASE24-es in November 2002, and have since signed seven new customers.

In addition, we have expanded our relationship with six existing customers who have signed for BASE24-es Enhanced Authorization Module. PRM addresses credit and debit card fraud, as well as anti-money laundering issues. Payments Manager is our BackOffice Suite.

Insession Technologies has two newer initiatives focusing on database monitoring and workflow automation. Although these are smaller in scale than ACI's initiatives, they are important to Insession. IntraNet's focus will be to expand its U.S. leading, money-transfer banking, global-messaging solution into targeted geos. Overall, we look to expand on our market leading position in e-payments and e-commerce marketplace with our new initiatives and focus on open-system opportunities.

During our 2004 fiscal year, our priorities will be to continue to focus on our core businesses and our newer products initiatives. Over time, we may to consider potential acquisitions if they meet our business and financial criteria. In closing, I feel good about our current position in a marketplace. We believe we are well-positioned with the change that we have made to our senior management team and strengthened our balance sheet, which includes a strong cash balance and good liquidity ratios.

We enter fiscal 2004 with a backlog of contracted business of $232.8 million, which provides us with a good base upon which develop. We also feel our cost structures are appropriate, and if there is an uptick in the global economy, we should be able to leverage the structure going forward. I look forward to the upcoming year.

Again, thank you for your support and interest in TSA.

At this time, we will open the conference call up to your questions. Thank you very much.

Our first question is from the George Sutton with Craig-Hallum Capital.

Congratulations on a great quarter. With respect to the strength in the quarter, can you talk about this being the fiscal year-end close -- I know in the past that has had an impact on your business. Do you think that was an impact here this quarter? And, also, the Patriot Act implementation that needed to happen by the end of September -- did that have any impact?

Let me speak to the first question, and I will let Mark answer the second. As it relates to the year-end, yes, there is some cyclicalness in, basically, our performance. Typically, the quarter is our best quarter. But I would also note that we've had two fairly strong quarters in a row, and we would hope this harbinger of things come, but most certainly cannot state that is the case.

No, I don't think our results were materially affected by the Patriot Act at all. We have sold our PRM system for anti-money laundering in a number of locations. Typically, those are rules-based deployments, where it's relatively inexpensive as opposed to using our neural technology. So the impacts to our revenue and to our performance as a result of the Patriot Act is not significant.

Okay, and then can you give us any sense, with respect to the ES pipeline, what sort of opportunities, you think, the broadened platform might be providing at this point?

Yes. In terms of -- what would I say? I mean, the pipeline looks good. It has opened up doors. If you think about the customers, some of which we have announced, some of which we have not been able to announce that we have signed. They have been predominantly customers that we wouldn't have got to before because they wouldn't purchased an HP and SK-based system.

We have a six-quarter pipeline where we try to track activity in our sales channel. And we continue to see the ES pipeline to businesses -- I mean, you're going to close it, but the activity levels continue to increase quarter over quarter as we get more message out. We believe as we start getting more of our clients live and have reference ability, that will continue to promote the product. And we will see even more activity at that product line.

Okay. Got you. Lastly, the $2 million in staff reduction, was that included in the numbers you are giving us? And, secondly, the use of cash -- if I heard you correctly, you just stated that basically you like the fact you have liquidity and you'll look to make some acquisitions potentially going forward. But nothing in terms of a consideration of a dividend or a buyback or anything like that?

I'll let Dave answer the first quick question, and then I'll answer the second one.

If I understood your first question correctly -- whether the $2 million was included in our operating expenses for the quarter?

Yes.

Yes, it was.

Okay.

As for the second question, we will look for what I would call opportunistic acquisitions over some period of time or strategic acquisitions which make sense the organization. I would say for next fiscal year, the intent is to keep our powder dry, focus on what we're doing. At this point in time, we have given consideration, but there is not any thought process as to a dividend or, basically, a stock buyback.

Okay. Great. Thanks.

Our next question is from Franco Turrinelli with William Blair & Company.

Hi. Welcome to the conference calls. Couple of questions for you, if I might. First, I just wanted to confirm that I heard you right. It sounds, Greg and Mark, as though you're very encouraged by what you're seeing, but you don't yet see loose purse strings from your customers. Is that a fair characterization?

Well, I'll let Mark speak to it, also. But I would say, we most certainly wouldn't characterize it victory has been won. We do see some uptick in activity, which hopefully will turn into sales and revenue. But we cannot say that at this point in time.

I certainly wouldn't use the word loose. I think there is not a death grip on their money anymore. How is that? We have seen some decisions by customers to start investing again. It's not broad, Franco, in terms of everyone's opening up their purse strings. But it has improved a bit. But it's not crazy -- not crazy yet.

Mark, what's the kind of fact -- and I know you can't generalize, but maybe you can just kind of talk us through this little bit. In the situations where people have chosen to do something, particularly some of the more fundamental infrastructure upgrades, what is causing it? Is it volumes yet? Or is it functionality? Or is it just this is being so over due for so long that they've finally kind of gotten around to it?

I think it's a combination of a number of things. Remember, there is still a tremendous number of custom [despoke] systems that are used to process these environment, and so you have volume issues. You have functionality issues. Some mandated. Some but to be responsive to the marketplace -- things like [Triple Daze] and EMV.

When those issues hit a specific system, the amount of development work that has to be undertaken, is enormous. So it causes those customers to start looking at their total cost of ownership and how much it costs to maintain and support those environments and upgrade them. That typically causes them to start looking around again to see what their options are. I think we will continue to see that. Before Y2K, they either decided to swap out their house systems or they upgraded them.

Well, now it's a few years later, and you have other issues coming up. So it causes them to re-look at it again to make sure they have the right strategic platform for the long-term. So I think we will continue to see that. It's not like it's a huge tidal wave. But over time, people continue to look at their systems.

Dave, I have a couple of questions for you, if I may. Excluding the 9.3 million of non-deductible charges included in the year, it looks to me like the tax rate came in at about 45 percent for the year -- maybe just a shade light. Did I do my math right?

You did it pretty well.

Okay. I'm assuming that the restructuring expenses incurred in the quarter would have been taxable more or less at that rate?

Yes, we would expect those to be deductible expenses. I think we're saying the same thing.

Yes. Exactly. I'm not sure I fully understood where that restructuring charge ended-up being taken. Was it mainly on the expense categories, was it kind of across the board or was it a specifically in one-line item? Did you end-up putting it in G&A or --?

No. It's spread really to the salary expense and the appropriate operating units within those two divisions. So it does get spread out.

So it would primarily be in the salary line. That's the major portion of it.

Okay. Great. Just to turn to both the revenue in the quarter and the backlog for a second -- and then I will get off the line and let someone else ask some questions -- but the professional services was way higher than I had modeled, which is great. Apart from bad modeling on my part, I was wondering if you could provide any insight into maybe what's going on there? Also, the MLS went down slightly sequentially, which I was surprised to see. Could you just give me a little bit of help on those two things?

On the services side, I would say the services probably surprised us a little bit in terms of their strength -- in terms of the amount of services work that we have in the quarter. I had made statements in the past over the longer-term, we expect services will flatten out. Well, I think we've gotten there.

What we're seeing is because of the number of new customers, which is where a lot of server support comes from. Because we have had more new customers this year, we have seen an uptick in services. While I think long-term, the amount of custom work that has to be done from our newer deployments will be less. I would expect our services work to maybe be a little bit higher and consistent with what we saw this last quarter in the near to mid-term.

Yes, it tends to have a fairly long tale of activity, right? I mean, that is one thing that we forget. These are fairly complex implementations.

Correct. A lot of service is driven by new customers. It's driven by some customer modifications for BASE24 clients. You will some spike-iness that, too, because some of the revenue recognition rules now for our newer products, services works can't be recognized until we get the product accepted by the clients. So and with the new rules of how revenue gets recognized in software business, there are lots of moving parts in this stuff. So, frankly, you're going to see some spike-iness even on the surface itself.

What about the MLS number? I was surprised to see that down sequentially.

I don't have those numbers in front of me.

Well, the MLS number really is roughly flat from Q3. Our MLS number for that quarter was 21.8, and we were 21.4 in Q4. And we are a little bit above where we were Q4 of last year. So I don't have any specifics. We would have to go back and look at it. Summer time is when a customer goes and says I want to [puff] or pay upfront, they would basically monetize the MLFs. There could be some of that.

We would have to look at it between ACI and Insession Technologies, where primarily the MLFs exist to see exactly where that might have happened. Or if we had some customer cancellations on contracts from various products, we would have to look into that. I don't know an answer to that.

Okay. I realized I was being picky. The amounts are small. On the backlog, though, there is a very significant pickup in the ILF component -- a little bit of a decline in MLFs. But you must have signed a new facility to [management] customer because expense doubled. Again, give us some insight into what you're seeing -- the different types of revenue streams?

That was basically a recategorization. That is one of Canadian contracts was being categorized in services, and we put it into FM. So, that did not double. We did not sign-up a new customer. That was taken out of services and put into an FM. So that was just miscategorized before. Relative to the (indiscernible), yes, you see the initial fee is uptick.

What that shows, frankly, as you could go figure out, is we have a good sales quarter. A lot of those sales would be from newer products that we can't recognize until we either have delivery or acceptance or some criteria. So rather than showing up in revenue, they go to backlog. So the backlog, basically, reflects a very strong sales quarter that we had.

So I can also presume that that's got some nice professional services pull for you, going back to the point we made earlier?

Yes. You could probably assume it would still be professional services that go along with that.

Terrific. Thank you, guys.

We will take the next question from Bill [Kitchell] with [Miller Race].

Thank you. I'm not as familiar with all the features of your backlog and the revenue breakdown. But could you just speak a little bit more to the license growth and the license growth opportunities ahead of you in light of year-over-year decline in license revenue?

What numbers are you referring to?

I'm just looking at the 36.6 versus 39 last year. I'm just trying to understand where the growth is because ultimately that will drive services, as well, I would think.

Yes. In terms of the license fees, you have to recognize potential -- the choppiness within our business these days because of the revenue recognition rules. So comparing this quarter to last year, if there was a $3 million -- just about a $3 million difference -- we can have by wide variations in a given quarter. You'll see that because the revenue recognition rules have changed, and so it's pretty hard to compare quarter to quarter. It would probably better to be comparing annual to annual because we're going to have more variations in that.

So relative to the trend, what do you see? Look at the backlog, what that really shows is a lot of it are license fees that we have contracted that we cannot recognize until we get them accepted or delivered, which we anticipate doing in the next twelve months. You see a pretty healthy backlog of license fees business. It reflects a lot of the sales we are making are of newer products that will not flow into revenue in the near term. They will flow into our backlog and eventually be recognized as we get those products delivered to the clients.

Relative to the future of our business and license fees, we're not anticipating that as a huge change in the macro-economic environment. We think we had a decent sales year in light of all the world things going on. We expect it to be about the same next year.

What should we think of as a growth rate in license fees? And if you can't talk about from that standpoint, what should we think about as a growth in backlog potentially looking out a year. Is it at this sort of 3 percent, sequential rate or is it higher or is there something that is restraining at or how should I think of it?

Yes. We wouldn't comment on those kind of results. I think we've given guidance, basically, on two specific areas. And we don't give guidance on those particular components of that.

So you don't talk about license growth in your guidance?

No, we don't.

Okay. Thank you.

Gentleman, at this time, there are no further questions. Are there any closing remarks?

Well, we would like to thank everyone for their participation today for our Q4 and year-end conference call. Thank you very much.

This concludes today's TSA 2003 fourth-quarter and fiscal year-end financial results conference call. You may now disconnect.