ACI Worldwide Inc (ACIW) 2004 Q1 法說會逐字稿

Good afternoon. My name is Cody and I will be your Conference Facilitator. At this time, I would like to welcome everyone to the Transaction System’s Architect First Quarter of Financial Results Conference Call. All lines have being place 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 this time, simple press star, then the number one on your telephone keypad. If you would like to withdraw your questions, press star, then the number two on your telephone keypad.

Thank you. I would now like to turn the conference over to Mr. Bill Holding, Vice President of Investor Relations. Sir, you may begin your conference.

Thank you and good afternoon. The participants for TSA First Quarter Financial Results Conference Call are Greg Derkacht, President and CEO, David Bankhead, CFO and Mark Viepan (ph), President of ACI Worldwide.

This conference call could contain forward-looking statements pursuant to the Safe Harbor Provisions of section 21E of the Securities and 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 (inaudible) 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 release Form 10-K and 10-Q filings.

The Agenda for the call today will be as follows, David Bankhead will discuss the Q1 financials, Mark Viepan will then discuss the Q1 highlights for ACI Worldwide and Greg Derkacht will then provide some closing comments at which time we’ll open up the call for your questions.

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

Thanks Bill and good afternoon. Today I’ll be discussing our fiscal 2004 first quarter financial results. I’ll start by highlighting some key miles achieved during the quarter.

Total revenue was $74m, an 18% increase over revenues for the first quarter of last fiscal year. Operating expenses were $58.5m, a 6% increase over the same period last year. Operating income was $15.5m with an operating margin of 21%. This represented a 107% increase over operating income for the first quarter last fiscal year. Other income was $2.2m primarily exchange gains. Net income was $10m, resulting in basic earnings per share of 28 cents and diluted earnings per share of 27 cents. Operating cash flow was $11.1m. Our cash balance at quarter end was $125.7m.

The $74m of revenues is comprised of the following -- software license fees of $41.2m, maintenance revenue of $21.3m and services of $11.5m. The license fee revenue of $41.2m was comprised of $20.2m in the initial licenses fee and $21.0m (inaudible) license fees.

Revenues for each of the geographic channels were as follows -- Unites States $29.5m, America’s International $8.9m, Europe, Middle East and Africa $27.1m and Asia Pacific $8.5m. Revenues for the three business units were as follows -- ACI, $57.7m, Insession $8.4m and IntraNet $7.9m.

Operating expenses for the quarter were $58.5m, which is an increase of $3.5m over the first quarter of last fiscal year. The increase is primarily due to increased distributor commissions reflected in cost of software license as well as the foreign exchange impact on salary expense, reflected primarily in research and development expense.

Our effective income tax rate for the quarter was 43%, reflecting the results of our ongoing tax planning initiatives. Our ending backlog was $230.3m, which is comprised of recurring backlog of 166 …Excuse me, I’m sorry $231.8m… which is comprised of recurring backlog of $166.2m and non recurring backlog of $65.6m. The recurring components are monthly license fees of $74.3m, maintenance fees of $82.8m and facilities management fees of $9.1m. Non-recurring components are license fees of $44.0m and services of $21.6m.We include in backlog all fees specified in signed contracts to the extent we believe at this time that recognition of the (inaudible) will occur within the next twelve months.

Thank you for your time this afternoon, I’ll now turn the call over to Mark Viepan for his comments on the ACI business unit.

Thank you Dave. Good afternoon everyone. I’m here to give you an update on the first quarter results for ACI worldwide. ACI’s revenue for the (technical difficulties) $7.7m.

ACI had good results and we signed a number of new contracts during the quarter. Some of the highlights include system and capacity upgrades of over $100,000 of (inaudible) customers. ACI licensed products to eight new customers in a quarter. These products included 1 base 24, 1 base 24 ES, 5 proactive risk manager and 1commerce gateway licenses. Six of these new accounts were from the (inaudible) region, is indicative of the success we had in this region during the quarter. This includes the sale to a top ten Bank located in France and the addition of a new country Rwanda, which expands our presence in the 74 countries throughout the world.

We were especially pleased to have sales in large clients in both France and Brazil in the quarter. We believe that both these markets provide growth opportunities with our open systems solution set and the results from this quarter show progress in both areas.

ACI licensed 13 new applications to existing customers during the quarter. These include licenses of our base 24 ES, base 24 Mobile top up, commerce gateway, automated key distribution system, proactive risk manager, payments manager and Ecareer software.

With the ASI commerce framework and our continued investment in multi platforms integrated payment solutions, we believe we are well positioned in our market space. ACI continues to invest heavily in our new base 24 ES product line. We have licensed this new technology 15 times and we have 4 customers running the system in production today. As we move more of these customers into production we believe we will be able to establish the references needed to drive further success with this leading edge product.

Our continued success with the proactive risk manager product as illustrated with the new customers signed in Q1 is another area of potential growth for ACI. We believe our investment in this product line as well as our investments in the other products included within our ACI commerce framework will position us to win more business as market conditions improve throughout the world. Thank you for your continued interest and I will now introduce Greg Derkacht.

Thank you Mark very much. We appreciate your attendance today and your interest in TSA. I’m pleased with the strong earnings and revenue growth in Q1. During the first quarter, we expanded our customer relationship through additional software and service activity and added 15 new customers. As Mark noted we also brought a worldwide presence to 74 countries. Our three business units -- ACI Worldwide, Insession Technologies and IntraNet generated $15.5m in operating income for the quarter as they continued to effectively manage their businesses.

As you know our strategy includes focusing on our open system opportunities while seeking to expand in certain geographic areas. For ACI Worldwide these initiatives include Base24-ES, PRM, Proactive Risk Manager and Payments Manager. For Insession, these initiatives include database monitoring and work flow automation. IntraNet meanwhile is looking to expand its US leading money transfer and global messaging solution into targeted Geos.

Our results indicate the company is off to a good start for fiscal 2004. We entered Q2 with a twelve month backlog of contracted business of $231.8m, which provides us a base on which to build. However, as we’ve indicated in previous conference calls our business is difficult to project on a quarterly basis due to the nature and timing large application software projects and capacity upgrades. Accordingly, we continue to feel it’s best to give annual as opposed to quarterly revenue and EPS guidance.

With our first quarter results and an assumed 43% flat tax rate, our annual revenue guidance for 2004 is being revised from $266m to $287m to a range of $271 to $287. Our EPS guidance range is being revised from 60 cents to 72 cents per diluted share to a range of 65 cents to 77 cents per diluted share. Although we remain cautious for outlining quarters in fiscal 2004, we believe that if the macro economic continues to improve we are in a good position to leverage our cost structure. Thank you very much.

Cody we’d like to open up the conference to the Q and A at this time.

At this time I would like to remind everyone, in order to ask a question please press * then the number 1 on your telephone keypad. We’ll pause for just a moment to compile the Q&A roster.

Your first question comes from Franco Terrinelli with William Blair & Company.

Hi, good afternoon everyone how are you?

Hi Franco

Well I’m sitting here with a good problem on my face, which is that …. I have a little bit of egg on my face because I obviously misjudged the strength of the business in the first quarter. The first quarter has tradition … somewhat weak seasonally and I know that you did not provide any guidance for the quarter and so my estimates were my own so to speak, but it feel like an unusually strong quarter at least adjusted for seasonality and I’d like you to first of all tell me if that’s your assessment as well? And secondly, is there something kind of peculiar kind of going on here in terms of the more traditional kind of breakout of the year in terms of revenue that we should be aware of going into ’04?

Let me let Mark talk also Franco … yes Q1 was a very strong quarter for us and it typically is seasonality, but with some of the new changes and some of the accounting rules basically which we have to abide by at this point in time it’s changed some of that picture, but in saying that yes it was a very good quarter.

Frankly historically Q1 has been our weakest and its still the most challenging from a sales force career in a new fiscal year as Greg has said, now with some softer (inaudible) recognition rules we have, especially with new products, we have to wait till they are extracted before we can recognize and in this quarter we had some large one time items that were sold previously that were recognized in this quarter that helped our performance. So in terms of historic, you won’t see the same kind of tarrying price on the path where Q1 was always by our worst quarter. It’s going to be chunky now. We’re going to have good quarters and exceptional quarters, bad quarters or whatever it depends on when we can recognize given deals and a big item, a big license, could be a big project could have a huge impact on a given quarter.

Mark, on that front and sorry to go on about this, but historically the first quarter had been weak because in October, November, December you know clients really didn’t want to sign or undertake new projects because they were getting ready for the busy holiday season, you know your sales people are closed (inaudible) year so, you know they were getting ready for the new fiscal year. It seems though what you’re saying, is because in fact a number of projects need to be completed in the run up to the busy holiday season and therefore are getting accepted on October or November we are actually going to see, you know, it’s likely that the first quarter will now be a seasonally strong quarter in the future periods. Is that at all on the mark?

I don’t know that I would make that leap of faith. I would have to see some trends to say whether or not that’s going to be true over a few years. I think it is fair to say, I mean think about it, you’re right, from a sale stand point year Q1 is our most difficult time of year to get anybody to sign anything and it’s the beginning of our fiscal year, new com plans and we all know what sales people are like. Q4 is usually our strongest so some of the benefits we got in Q1 was probably due to our, well not probably, was due to our strength in Q4. Revenue recognition is more challenging now and it is pretty hard for us to predict when a given deal will be recognized because a lot of cases you have to get the customer to accept and that isn’t always, you know, just a matter of them saying ‘ I accept’. They might be in production and we still have to get them to sign a letter that says they accept and all these kind of things so Frank I think it would be a leap of faith to say that the way you describe is what a trend that we would expect in the future. It may be but I don’t see it right now. I just don’t know it.

Ok looking at both the year over year and the sequential trends, the numbers that catch my attention are EMIA (ph) must have had a terrific quarter. Initial license fees were very strong and ACI so my guess is that that’s the where we saw it. You know software sales with ACI and EMIA, could you just give us some color about whether or not there is one or two very large projects which kind of skewed the results just again, for a better interpretation both of these and of future? And with that I’ll hand it over to anyone else who’s on the call thanks.

Your analysis is correct EMIA had -- in all regards, the project that I was referring to that was a significant revenue recognition event for us this quarter happened in the EMIA that has certainly helped their results but beyond that from a sales stand point though we don’t disclose sales number they had a very robust sales quarter. They had good activity, I made mention of eight of the new customers that we signed six of them were from that region and that is an indication of the strength that they had in this past quarter end and quite frankly we’re pretty bullish about the opportunities in the EMIA. Last year they were pretty down and weren’t so good they seemed to turn the corner a bit so it’s a much more optimistic over in the European region right now.

Great thanks Mark keep blowing away my numbers please.

We wish.

Your next question comes from George Sutton with Greg Hollum.

Hey guys congratulation on the great quarter. The EMIA business in particular I’m just curious about is this a sustainable recovery that you think we’ve seen, I’d also like to parlay that question into a foreign currency question in terms of how you plan to or don’t plan to hedge your business from that perspective going forward?

Hi this is Mark, I’ll answer the first part. Is it sustainable, right now the pipeline of activity in that region looks pretty solid. I mean how long is it sustainable? I don’t know but it looks pretty good now. Last year it didn’t look very good and we were having some issue over in that region and it has improved, I won’t say it’s dramatically better but it’s definitely better than last year. I think the first quarter results are indicative of that economic reality in that region.

Now it’s not clear to me how much of the upside in the initial license fees were capacity upgrades but it seems that has consistently been stronger than we expected and that I assumed is just the debit market continues to improve, would you agree with that statement?

Well capacity upgrades are very hard---last year we had a very good year of capacity upgrade if you recall last time I talked about 47 upgrades during the year of a value over $100,000. We had some very significant customers’ pre-purchased capacity but very hard for us to predict when an in vigil client will eclipse their capacity and when they’ll come back. We only had five this last quarter in Q1 compared to last year same quarter it was significantly lower than last year it was like 12 in Q1 of last year. It shows you that it’s spiky. And I expect that to continue, debit volumes, card volumes, probably the EFT volumes continue to increase and we will benefit from that it’s just very difficult and challenging for us to predict and anticipate those things but they’ll continue to happen just---whenever they chose to happen.

Now on the other side of the equation obviously Asia Pacific is pretty small for you although it appears that part of the market seems to be turning quite a bit, can you give us any sort of initiatives that you plan for that market and the size of that market?

Yes the Asian Pacific market, I know they had a recently a pretty good revenue (inaudible) P&L results, in terms of sales activity I would say right now it’s pretty tight down there and we aren’t seeing the kind of success of that we would like to in that region. Primarily the growth opportunities are from the Asian countries in places like India and potentially China but even that’s a little bit difficult but other Asian countries. We are doing some things operationally right now to try to improve our performance down there and quite frankly the biggest challenge we have in that region is our business has changed in the last few years. We aren’t just a base 24 company any more we have a very expansive product set and because of the – you know the size of that region out there and the number of distributors we have down there we don’t think we’ve done an effective of a job as we need to get the message out, so all of the market place is about all that they can license for us. So in terms of operation initiative our primary focus in that region right now is to get our message out and find more opportunities for the expansion with the products we have rather than just a base 24 sale. Well that does --

Another question on foreign currency just to make sure we understand. Are you doing no hedging of foreign currency could that if the dollar for some reason does strengthen, and that’s not a prediction, but if it did would that have a negative impact on you?

Yes this is Dave Bankhead, yes if the dollar does strengthen it could have a negative impact on the financial statement.

But you’re choosing not to hedge in any way?

We choose at this point not to have any formal hedging programs in place with our cost versus revenue structure in some foreign countries we have some natural hedges in place, but that’s correct there are no formal hedging programs.

Okay and you have the painful problem of having a lot of cash on your balance sheet. Can you give us any updates? I know the board has met to discuss some of these opportunities, any conclusions?

Yes this is Greg. Basically we continue to look at opportunities for investment of the cash. As I said before based on a very strict criteria and we will continue that process.

That was a great amount of detail thank you Greg.

You’re more than welcome

And then lastly with respect to looking forward into the next couple of quarters – it looks like the maintenance revenues were actually lower – well they were lower than the prior quarter. Should we be looking at this $11m in change number as the ongoing maintenance level or should it be a different number than that?

I’m sorry George which number are you referring to? (inaudible) we believe the maintenance …

The services business, see a strong $14m number last quarter that moved down $11.5m this quarter. We’re just trying to understand is that a better ongoing number to be using per quarter than the $14m?

Well you know I think there are several things here. First of all the services side of the business can be hung up as far recognition along with the licensees. We see again that would cause some lumpiness potentially in that portion of our business.

So as for example, a large base es deal would come in say next quarter it would with that a lot of its service business that has been hung up.

Yeah, there is a couple of moving parts in this, one is realized in Q1 with the holiday season and you tend to have less services because we -- people don’t want to work for a couple weeks, so you have less billable time.

Another thing that’s important to note is in terms of the revenue recognition for some of our newer products in addition to the product is successful to recognition, sometimes the services associated with the deployment of that product also (technical difficulty) (inaudible) until we get acceptance on the product to recognize. So we saw that in Q4 for one deal that we had (technical difficulty) (inaudible) all of our services revenue recognition again in Q4, which made than higher than is probably normal.

Okay.

So there again even with the services, we’re going to have some chunkiness because of the way it’s off of revenue recognition rules -- have changed. We’ve had to adapt our business accordingly.

Well so far it’s all been chunky good so congratulations.

Yeah, we’ll wait …we’ll say that when we have the chunky bad.

Thanks guys.

Once again I would like to remind every one in order to ask a question please press star then the number on your telephone key pad now. At this time Mr. Holding we have no further questions.

We would like to thank every body for participating today on our Q1 conference call, thank you. And that conclude our call today.

This concludes today’s conference. At this time you may disconnect.