ACI Worldwide Inc (ACIW) 2004 Q2 法說會逐字稿

Good afternoon. My name is Derek, and I will be your conference facilitator. At this time, I would like to welcome everyone to the TSA 2004 second-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). Thank you.

I would now like to turn the conference over to Mr. Bill Hoelting, Vice President of Investor Relations. Please go ahead, sir.

Thank you, and good afternoon. The participants for TSA second-quarter earnings conference call are Greg Derkacht, President and CEO; David Bankhead, CFO; Mark Vipond, President of ACI Worldwide.

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 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 in Form 10-K and 10-Q filings.

The agenda for the call will be as follows -- Dave Bankhead will discuss the Q2 financials for TSA. Mark Vipond will then discuss the Q2 highlights for ACI Worldwide. 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 Dave Bankhead, CFO of TSA. Dave?

Thanks, Bill, and good afternoon, everyone. Today, I'll be discussing our fiscal 2004 second-quarter financial results. I will start by highlighting some key milestones that we achieved during the quarter.

Total revenue was 76.5 million, an 11 percent increase over revenues for the second quarter of last fiscal year. Operating expenses were $62.5 million, an 8 percent increase over the same period last year. Operating income was 14.1 million, with an operating margin of 18.4 percent. This represented a 25 percent increase over operating income for the second quarter of last fiscal year.

Net income was $8 million, resulting in a basic earnings per share of 22 cents and diluted earnings per share of $0.21. Operating cash flow was 10.3 million. Our cash balance at quarter end was $137.2 million.

The $76.5 million of revenue is comprised of the following -- software license fees of 42.4 million; maintenance revenue of 22.3 million, and services revenue of $11.8 million. License fee revenue of $42.4 million was comprised of 20.2 million in initial license fees, and 22.2 million of monthly license fees.

Revenues for each of the geographic channels were as follows -- United States, $31.5 million; Americas international, 9.7 million; Europe, Middle East, and Africa, $25.7 million; and Asia-Pacific, 9.6 million. Revenues for the three business units were as follows -- ACI, 57.9 million; Insession, 10.5 million; and IntraNet, $8.1 million.

Operating expenses for the quarter were 62.5 million, which is an increase of 4.5 million over the second quarter of last fiscal year. This increase was due in large part to exchange rate fluctuations accounting for $2.6 million of the increase. The Company often incurred increased employee-related expenses, including sales commissions, variable compensation, travel, and commissions paid to distributors, much of which reflects the increased sales and revenue activity during the quarter. These increases were partially offset by savings of approximately $1.6 million as a result of restructuring efforts completed during the last 12 months.

Operating expenses also reflected an increase of $4 million over our first quarter of this fiscal year. That increase was primarily due to increased payroll tax expense incurred at the beginning of each calendar year, increased sales commissions, variable compensation, and exchange rate fluctuations. Exchange rate fluctuations accounted for an increase of approximately 1.1 million over Q1 expenses. The Company also incurred increased professional fees related to ongoing tax planning initiatives, as well as Sarbanes-Oxley compliance including Section 404.

Our ending backlog was 233.1 million. We include in backlog all fees specified and signed contracts to the extent we believe at this time that recognition of the related revenue will occur within the next 12 months. Backlog is comprised of recurring backlog of 170.8 million and non-recurring backlog of 62.3 million. The recurring components are monthly license fees of 73.7 million, maintenance fees of 88.0 million, and facilities management fees of $9.1 million. Nonrecurring components are license fees of 39.5 million and services of $22.8 million.

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

Thank you, Dave. 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 $57.9 million. We had good results, and we signed a number of new contracts during the quarter. Some of the highlights include -- system and capacity upgrades over $100,000 had 17 customers. This level of capacity upgrades was significant, and materially impacted ACI's results for the quarter. ACI licensed product to 14 new customers in the quarter. Those products included six BASE24, four Proactive Risk Manager, one Payments Manager, two NET24, and one Smart Chip Manager license. These new accounts were evenly distributed in all three of our geographic regions.

We saw an increase in sales results in the past quarter, with particular strength in the EMEA market. ACI also added clients in Algeria and Montenegro, bringing the total number of countries in which we do business to 76. ACI licensed 12 new applications to existing customers during the quarter. These include licenses of our BASE24-es, BASE24, Automated Key Distribution System, Smart Chip Manager, Commerce Gateway, Proactive Risk Manager, Payments Manager, and e-Courier software.

With the ACI commerce framework and our continued investment in multiplatform, integrated payment solutions, we believe we are well-positioned in our marketspace. There are signs that market conditions are improving demand for ACI's software solutions. We had a very good sales quarter, and our pipeline of activity is solid. Sales of BASE24 and our Proactive Risk Manager products were especially strong in the quarter.

In addition, a number of key clients extended the terms of their BASE24 contracts for five additional years. These term extensions secure ACI's recurring revenue as our clients continue to derive value from their ACI software in the processing of electronic payment transactions.

We believe our investment in the 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 introduces Greg Derkacht.

Thank you, Mark. We're very pleased with our strong financial results for the second quarter and the first half of fiscal 2004. For the first half of fiscal 2004, revenue growth was 14 percent, and net income growth was 155 percent as compared to the first half of fiscal 2003. Our sales activity was strong across all geographic channels. Our business units -- ACI Worldwide, Insession Technologies, and IntraNet -- continue to effectively focus on managing expenses while seeking out growth opportunities within their markets. The business units added 18 new customers during the second quarter.

Throughout fiscal 2003 and the first half of fiscal 2004, we have focused on a number of corporate matters. A great deal of activity has occurred with the (ph) Sarbanes-Oxley and the investigation by the SEC. As we announced mid-April, the SEC has terminated their investigation with no enforcement action recommended. We're very pleased with the SEC's decision, and happy that we are able to put this matter behind us.

We also have made progress on a number of internal fronts. We have centralized our finance, tax, legal department, and we have enhanced internal controls. Like a lot of companies, we have focused on corporate governance, which to us, has resulted in an ISS corporate governance score of in the '90s, which exceeds most software companies.

With these and other internal improvements, we are now in an even better position to pursue appropriate strategic opportunities. We regularly review acquisition candidates, and we will continue to do so. We will be diligent and patient in that process, however.

Overall, we remain cautiously optimistic with our outlook. As we have previously discussed, the nature of our large software implementation projects and our software revenue recognition policies can lead to significant variations in our financial results.

Based on our financial results through the first half the year, our backlog of contracted business, and our projected pipeline, we are now increasing our annual guidance for fiscal 2004. Assuming a 43 percent effective tax rate, and no significant changes in the projected foreign exchange rates, our annual revenue guidance range for 2004 is being revised from $271 million to $287 million to a range a $282 million to $292 million. Our EPS guidance range is being revised found $0.65 to $0.77 per diluted share to a range a $0.74 to $0.83 per diluted share.

Thank you very much for your attendance today. And at this time, we will open up the conference call for your questions. Again, thank you very much.

(OPERATOR INSTRUCTIONS). Franco Turrinelli, William Blair & Company.

A couple of questions for Mark first, and then maybe I'll come back to Greg. Very interested to hear about the term extensions from significant customers. A couple of questions related to that. First, were these associated also with capacity upgrades? And secondly, I'm sure they extracted some economic value out of you. What is the pricing environment like out there for these extensions?

That's a fair question. The term extension environment -- you now, specifically this was in the U.S. We had some very significant customers. And yes, some of them were coupled with capacity upgrades. And when they try to extract economic value from us, it's usually in that forum, Franco. They say, okay, I'm going extend for five more years, I need more capacity because my volumes will increase in that time, what can you do for me? That is usually where you end up in the negotiation relative to financial terms and conditions.

And so in this situation of last quarter, yes, there was some of that. Absolutely. But very important for us -- it secures the existing revenue streams and typically, we get more revenue for the capacity.

Right. So essentially, you're giving them some capacity for free for the extension of contract, I guess -- not for free, I'm sure.

Not for free -- just he (ph) says, can you work out an arrangement -- it's never for free. But as our customers get bigger and bigger volumes, the economic -- the amount of money that we get for it does decrease. So their cost per transaction goes down. But yes, they do wheedle in the -- or incorporate in the capacity increases as well as with the term extensions.

The other question is I guess -- this isn't really for you; it's maybe more for Greg. Both Insession and IntraNet had pretty good quarters, at least on a sequential basis. Are you seeing some changes in the environment for those business units?

Well, I would say much like ATI, Franco, that yes, we are. The environment seems to be good, particularly in the tools business -- the infrastructure tools. And so Insession has had several good very good quarters at this point in time. I would say, as I've mentioned before, IntraNet is a little bit more niched in their capabilities and their opportunities because of the large size of the system. But we continue to see good performance out of both of the units.

How far through are you on the IntraNet replacement cycle, do you feel?

We are very close to being completed with it at this point in time, Franco.

So should we expect that unit, if nothing else, to reflect the completion of that replacement cycle in future quarters?

Well, in most cases, as far the revenue impact, you've seen a great portion of it already. But we do expect revenues to be flat in that environment for some period of time. We think that there are some service opportunities from the unit. But we do expect flat performance out of IntraNet.

I'm sure no one on this call minds analysts being as wrong as I was on our expectations for the quarter. Nevertheless, you know, as I look at your guidance for the remainder of the year, and taking into account your comment on the difficulty in projecting quarterly results because of the revenue recognition policies, your guidance does presume a second half of the year which is no better, and if anything, slightly worse than the first half. What do you see on the horizon that kind of leads you to that conclusion?

Well, I will give an answer (ph) to that, Franco, and then I'll let Mark speak, if he would like to. As we have stated previously -- and I most certainly want to convey the fact that there is some upside opportunity. But we like to put ourselves in a position where we feel that we have a very high opportunity of making the numbers. But more importantly, as we have stated before, there is some significant fluctuation. Contracts out of the third quarter -- in some cases flew back -- were drawn back into the second quarter. And you'd have other contracts which basically in the third quarter are being pushed out.

So we have to attempt to measure this on a quarterly basis and make that best call we possibly can with the volatility that we have got because of the size of these projects. And so, again, I don't want to say there's no upside to this, but we do want to put -- have the other numbers that make sense for us.

My only comment would be -- to add some more color to Greg's commentary -- as I manage our backlog -- deals can come in and out. And now, with the revenue recognition rules, there's a lot of stipulations on a given product or a given customer as to when we can actually recognize revenue -- or, if it is a ratable-base revenue recognition, when it will actually start.

So in Q2 this last quarter, we had a great deal of capacity upgrades -- that is, as we have said many times, very difficult to predict those -- virtually impossible in some cases. We have an idea of a steady-state -- but boy, they can come and go. So we had a lot of capacity upgrades. We would not have expected internally to do as well as we did in this last quarter. Some of it is also due to the fact that we accelerated deliveries from things that we had anticipated in Q3 and Q4.

As we've said many times, sales activity is quite good. We had a very good sales quarter. But sales as we define them do not necessarily translate into revenue in the short term. Any more relative to products that we sell, or sales that we make to clients, unless it's a category A product like a BASE24, or it's a capacity upgrades, or it's a simple add-on, it typically -- the revenue recognition of it will be delayed until sometime in the future, typically upon acceptance from the client. And so we can have great sales, and the revenue from that may not come for one, two, three, or four quarters. So things are always moving in and moving out. And I said that last time -- we'll have chunkiness. And we had another good -- chunky good quarter this last quarter. And equally, we can have a quarter where things don't line up quite as well for us. And second half, we may have some of that.

George Sutton, Craig-Hallum.

First from a geographic perspective -- last quarter, you defined the European market as really the area of strength, and the U.S. was starting to turn. Can you give us an update on -- from a geography perspective -- a geographic perspective, is it still Europe really driving the boat, with the U.S. still in a turn mode? Or are you starting to see better results in the U.S.?

I would say Europe has definitely been the strong last quarter ending Q1, and quite frankly, I expect them to continue to have strength this quarter. The U.S. had a good quarter. I won't say great, not nearly a strong as EMEA, so that was positive. We should have a good results up in Canada. So the Americas is improving this quarter. Asia-Pacific continues to be the laggard relative, at least, from our sales results. We have more activity, but boy, it sure as heck hasn't translated itself into tangible sales increases over the last couple of quarters. So I don't think it's materially different than it was from last quarter, George, in terms of where we see the strength and weaknesses.

And you've discussed Asia-Pacific -- of course, you had pulled back awhile ago. Is there any sense that there makes sense to expand in Europe -- I'm sorry, in Asia-Pacific?

Well, the areas of -- the markets of interest continued to be India and China. And we continue to have an operation in Japan, which has not produce the kind of result we're looking for. The exciting places right now are India and China. We have a very strong distributor in India. I should know this, but I can't tell you -- I think it's 14 or 15 clients that we have in India that they have been successful in selling and installing. China -- we have some clients in China, but we're looking for more partners to take us into China rather than to go in there directly.

Overall, Australia -- there were some recent announcements from a client of ours down in Australia that they've made to the press about recommitting to the BASE24 and using that to process their ATM networks over the next five years. We're very excited about that. There is some good activity. And actually, with the broad set of products that we have, we're seeing more sales activity. But we're still waiting for that to translate into sales results and the ultimate revenue that comes from them.

That is a long-winded answer to say, "We are staying the course."

It was a long-winded question, so -- Greg, I know you are going to give me great detail on this question -- but I'm curious. I know you have been looking at some of the deals that are out there from an M&A perspective. Can you give us any sense of what kinds of opportunities you're interested in going forward, now that you are more internally ready?

Yes, George, I will attempt to answer to the extent that I can. We have set, as I mentioned before, a set of criteria which we evaluate continuously for acquisition potentials. And now that I think that we've got ourselves in the position where we can focus more on those opportunities, we're going to start looking.

I would say that particularly out of the bag, or out of the starting gate, we want these things to be somewhat synergistic and have opportunities for cross-sell opportunities and those kind of things. They don't necessarily have to be exactly in our space. But we also want, as I'd mentioned before, I think before all the issue started with the company -- good management organizations, good teams and units that have the capabilities of standing alone by themselves.

And so those are kind of the criteria we're looking for. Ideally, we are absolutely going to find synergies with the organization. We really want to leverage our distribution channel. It's big. For a company this size, it's extensive. And we think we can do a better job of utilizing that channel and expanding people internationally and to other places in the world. So those are the kind of opportunities I will say we're looking at at this point in time.

Okay. Great. Guys, tremendous job. Thanks.

(OPERATOR INSTRUCTIONS). We have no further questions at this time.

Thank you for attending our Q2 conference call. We look forward to talking to you down the road with our Q3 results. Thank you once again.

Thank you, everyone.

That concludes today's TSA 2004 second-quarter earnings conference call. You may now disconnect.