ACI Worldwide Inc (ACIW) 2004 Q3 法說會逐字稿

Good afternoon. My name is Michael and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Transaction Systems Architect Third Quarter Financial Results 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. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press star then the number 2.

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

Thank you, and good afternoon.

The participants for TSA’s Third Quarter Earnings Conference Call are Greg Derkacht, President and CEO; David Bankhead, CFO; and 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 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 strictly historical statements could constitute forward-looking statements which involve risks and uncertainties which could cause actual results to materially differ from those in 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 10K and 10Q filings.

The agenda for the call will be as follows. Dave Bankhead will discuss the Q3 financials for TSA, Mark Vipond will then discuss the Q3 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 Dave Bankhead, CFO of TSA.

Thanks, Bill, and good afternoon.

Today I’ll be discussing our fiscal 2004 third quarter financial results. I’ll start by highlighting some key milestones that we achieved during the quarter.

Total revenue was $72.5m, a 2% decrease from the third quarter of last fiscal year. Operating expenses were $59.6m, a 14% decrease from the same period last year. Operating expenses last year reflected a goodwill impairment charge of $9.3m. Operating income was $13m for the current quarter, with an operating margin of 17.9%. Net income was $18.7m, resulting in basic earnings per share of 50 cents and diluted earnings per share of 49 cents. Net income and earnings per share amounts include a one-time net tax benefit of $10.6m and 28 cents per share, respectively. Operating cash flow was $23.1m. Our cash balance at quarter end was $158.9m.

The $72.5m of revenue is comprised of the following: software license fees of $37.5m; maintenance fees of $23.1m; and services of $11.9m. License fee revenue of $37.5m was comprised of $17.3m in initial license fees and $20.2m of monthly license fees.

Revenues for each of the geographic channels were as follows: United States, $30.1m; Americas International, $10.1m; Europe, Middle East and Africa, $23m; and Asia Pacific, $9.3m. Revenues for the three business units were as follows: ACI, $55.3m; Insession, $9.4m; and IntraNet, $7.8m.

Operating expenses for the quarter were $59.6m, which represents a decrease from $69.1m for the third quarter of last fiscal year. When comparing the two quarters, the following should be noted. Last year’s number included a goodwill impairment charge of $9.3m, which reflected the write-down of the last component of the goodwill associated with our MessagingDirect business. This quarter reflects an increase in selling and marketing expense associated with increased sales activity when compared to the same quarter last year, and the decrease in cost of maintenance and services expense reflects the results of restructuring efforts completed during the last 12 months.

During the quarter the Company completed a tax restructuring and made the associated tax elections with respect to our MessagingDirect limited subsidiaries. These actions resulted in a $12m deferred tax benefit which is reflected in the increase in deferred income taxes on the balance sheet, as well as in the third quarter tax provision. This benefit, which has significantly reduced the Company’s effective tax rate for book purposes in 2004, is expected to be realized in cash savings to the Company from future tax deductions taken through 2016. The book benefit, as required by GAAP, is recognized in its entirety in the third quarter.

The Company also reflected two other one-time items amounting to $1.4m. These offset the $12m benefit from the MDL restructuring and resulted in a net one-time tax benefit for the quarter of $10.6m, or 28 cents per share. Our assumed effective tax rate for the fourth quarter is 41% and is reflected in our revised guidance.

We are continuing to experience increases in deferred revenue. This is reflected in the $10m net increase during the 9 months ended June 30th. This is due to a number of factors. For example, in regard to sales of emerging products, revenue recognition is different than that for established products, and generally is deferred until final acceptance or first production use by the customer. At that point, revenues may be recognized immediately or ratably over an extended period. In addition, in instances where customers are migrating to emerging products and the migration results in a modification of an existing agreement, currently recognized revenues may be deferred to coincide with the delivery and acceptance of the newer products. As sales of these newer products make up a large percentage of our total sales -- larger percentage of our total sales, the amounts of revenue deferred until later dates may increase until such time that these products achieve the maturity in the marketplace to allow us to recognize the revenue on delivery.

Our ending backlog was $232.8m. We include in backlog all fees specified in 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 $173.6m and non-recurring backlog of $59.2m. The recurring components are monthly license fees of $73m, maintenance fees of $89.5m, and facilities management fees of $11.1m. Non-recurring components are license fees of $34.4m and services of $24.8m.

Thank you very much for your time this afternoon. I’ll now turn the call over to Mark Vipond for his comments from the ACI business unit.

Thank you, Dave. Good afternoon, everyone. I’m here to give you an update on the third quarter results for ACI Worldwide.

ACI’s revenue for the quarter was $55.3m. We signed a number of new contracts during the quarter. Some of the highlights include system and capacity upgrades over $100,000 at 13 customers. ACI licensed [indiscernible] 7 new customers in the quarter. Those products included BASE24, BASE24-es, Proactive Risk Manager, and WINPAY24. We had good sales results in the past quarter, with particular strength in the EMEA marketplace and North America.

ACI licensed 7 new applications to existing customers during the quarter. These include licenses of our BASE24-es, BASE24, Proactive Risk Manager, mobile commerce, and automated key distribution system software.

One of the more notable contracts in the quarter was signed with Hewlett-Packard for the operation of Toronto-Dominion’s ATM network in Canada. Toronto-Dominion has been a customer of ACI since 1985, using our BASE24 software to operate their POS system and to support the [indiscernible] network in Canada. In 2003 they began evaluating options for operating their ATM network, which is supported with an in-house managed system. Against a variety of competitors, a contract was signed in June with HP to operate the system using ACI’s BASE24 and BASE24-es software. This is a 7-year contract that extends our longstanding relationship in providing software support for Toronto-Dominion’s environment. We are very pleased to be adding ATM support to our existing client relationship with this customer.

As always, there are a number of factors that are influencing ACI’s business. We believe the following opportunities and issues may impact our business in the future. We believe that demand within our market space is steady and we are well positioned to respond to those opportunities with our multi-platform ACI commerce framework solution set. We believe that activities to replaced in-house support of the EFT solutions will continue as financial institutions and processors are forced to respond to mandatory and market-driven changes. The recent contract with HP in support of Toronto-Dominion is evidence of this trend.

We believe that sales of some of our more recent product investments, including BASE24-es, Smart Ship Manager and Payments Manager, will make up a larger percentage of our new sales. We are pleased to see market acceptance of these new products.

In summary, ACI had good sales and solid results for Q3. We believe we are well positioned in the EFT software market with our current product strategies.

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

Thank you very much, Mark.

I’m pleased with our quarterly and year-to-date results. For the first nine months of fiscal 2004, our revenue was up 9%. Our operating margin is increasing 11.4% to 19.1%, and our net income up -- is up significantly. As we have stated, our Q3 EPS result, the 49 cents, included a net one-time tax benefit of 28 cents. This is one of several tax planning initiatives that we’ve undertaken. These tax initiatives began in second quarter of the last fiscal year, when our effective tax rate was in excess of 50%. Tax projects can be complex and expensive, and ours were no exception. While we incurred significant expenses associated with these projects, we continue to make good progress.

Our balance sheet continues to reflect our financial strength from cash of approximately $159m, and very little debt. We continue to evaluate the best strategic use of our cash, including appropriate acquisitions. We continue to be patient as we seek to identify candidates that will allow us to leverage us our key strengths -- in particular, our strong international direct channels which provide us global sales and service coverage, a customer list that includes some of the largest financial institutions around the world, and proven software solutions for mission-critical systems.

As you also know, there’s been a fair amount of M&A activity in the financial services industry. The effect of any bank merger on the Company depends on many factors, including the role of any -- of a TSA customer in the transaction. Some recently announced mergers involve TSA customers on both sides of the transactions. In these situations, we anticipate losing some maintenance and some licensing fee over a period of time but potentially increasing capacity license fees, though the effect is difficult to determine.

The demand for our solution remains steady as we experience good sales across most geographic regions. We begin the fourth quarter with a 12-month backlog of $232.8m. As a reminder, we continue to have contracts and portion of contracts which are outside the current rolling 12-month backlog.

In closing, we look forward to Q4 and the completion of a strong fiscal 2004. Assuming no significant change in the foreign exchange rates, our annual revenue guidance range is being revised from $282 to $292m, to a range of $291 to $296m. The Company is also revising its EPS guidance from 74 cents to 83 cents, to a range of 101 point -- $1.10 to $1.17, which includes a net one-time tax benefit of $10.6m or 28 cents per diluted share.

We thank you very much for your continued interest in TSA. At this time we’ll open up the conference call for your questions. Thank you.

At this time I would like to remind everyone, in order to ask a question, please press star 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 Turrinelli with William Blair & Company.

Gentlemen, good afternoon.

Hi, Franco.

Just looking at a couple of things more sequentially, I guess, relative to the March quarter, it looks as though all the geographies and all the business segments were slightly down. And I’m wondering if you could just give me a sense of how much of that was just an unusually strong second quarter, maybe some seasonal factors or maybe something that you see in the end markets? Thanks.

Mark -- this is Mark. My reaction to that is -- you know, as we’ve talked a lot of times about the chunkiness and capacity upgrades. Well, we had 13 capacity upgrades in the quarter. There were no big sizable ones in there. They were relatively small, all over $100,000. But we didn’t have any extraordinarily large capacity upgrades. And realize, relative to the license fees, that, you know, we’ve made no more comments about the new product sales that has had a tendency across the board -- across the Company to push out the revenue associated with those deals because of the delays in recognition based upon acceptance of first production use from our customers. So that [indiscernible], you know, [indiscernible] everybody across the globe -- all our regions across the globe.

Yeah, Mark, I mean, it looks as though, you know, there’s been -- I mean, you’re getting on the one hand, you know, pretty decent strength really across all geographies and all business lines. And there seems like a pretty balanced performance from the entire business.

Yeah, I think it’s pretty steady across the lines, so -- you know, we -- Asia Pacific is still continuing to be our weakest region relative to sales success, and [indiscernible] network we’re trying to address. But EMEA has had particular strength and North America really [indiscernible] on the heels of the Toronto-Dominion deal. It had very good sales success. And so we’ve had a fairly consistent performance across all regions except for -- with the exclusion of AP in terms of sales.

A couple questions more on the numbers. You commented on the deferred revenue balance, noting, you know, up relative to September 30th. But if I have my numbers correct, it was about flat relative to March 31st. Is that correct?

This is Dave Bankhead. Relatively flat compared to March 31st, but it has grown by about $10m over the 9 months of this year. And the point that we’re making there, Franco, we also saw a sudden growth in deferred revenue in fiscal year ’03. And that just again goes to the chunkiness of revenues. And as I mentioned earlier in the script, as we see more sales that involve implementation of newer products, that tends to push our revenue out further, and you see evidence of that in the growth in deferred income as well as cash being generated at a faster pace than income at this point in time.

Yeah, that’s a good point. David, is there any way to think through a relationship? Indeed, is there any that would be useful for us to understand a relationship between deferred revenue, backlog and actual in-period revenue?

Well, as you know, Franco, it’s complex. And you’ve named really all of the components that get affected anytime that you -- that we enter into an agreement. You enter into the agreement, it affects backlog, obviously. As we start to bill that customer, amounts go into either unbilled receivables and then billed receivables. And if they’re deals that I’ve talked about earlier that involve deferral of revenue, you see a build-up in the deferred revenue accounts. So it’s all affected. You can go nuts trying to tie them all together without [indiscernible] all of the individual pieces, including backlog. But you’ve hit the nail right on the head. They’re all affected.

You’re telling me to stop banging my head against a brick wall.

Well, you can do anything you want, but --

Or you could come bang it with us.

It’s pretty complex.

Okay. One final question. David, do I have it right? Year to date -- well, year to date 69 cents excluding the 28-cent tax benefit -- let’s see, 97 cents, right, including the tax benefit year to date -- which would suggest your fourth quarter number, you know, between 13 and 20 cents to get to the guidance that you’ve given us? You’re obviously famously conservative, but in the good old days the September quarter did tend to be, you know, maybe the strongest quarter. Anything that we should be aware of kind of going into the September quarter that might be a little bit unusual one way or the other?

I don’t think so, Franco. Historically, yes, it has been one of our better quarters, but I think [indiscernible] on numerous occasions. Our business is unfortunately really difficult to predict because of the chunkiness. One of the things that in the second quarter last -- of this fiscal year, there was a very large capacity upgrade which basically caused the revenue to be up some. And so, again, it’s just -- starting the quarter it’s really difficult for us to predict what kind of activity there’s going to be, whether it be Mark’s area or Insession’s or IntraNet, et cetera, et cetera. So while I think we’re famously conservative, I think the business kind of dictates that a little bit.

This is Mark. I would expect sales would be just like it has historically been, Franco, in that it’s the last quarter of our fiscal year, and so sales personnel are highly motivated to get as much as they can in. I wouldn’t expect that to change. It really just comes down to which of those sales can translate into revenue. And depending on the mix of the sales, I had a lot of -- a preponderance or increasing percentage of new product sales, then you can be well assured there will be no revenue associated with it. And it then comes back to a real wild card if you have any big capacity upgrades in there. I mean, those things are binary. They happen on [indiscernible]. I’m sure there’s things were [indiscernible], but you never know if you’re going to get them until you get them.

So I don’t think the sales number will -- the sales production will necessarily change in terms of the seasonality, but the way that revenue is recognized is definitely changing.

Okay. I have a couple of follow-ups, but I’ll let other people jump in. I’ll stop hogging the line. Thanks.

Thank you, Franco.

Your next question comes from George Sutton with Craig-Hallum Capital.

Hi, guys. Wanted to address a couple of the statements made on the call. First, the capacity upgrade piece. Mark, you mentioned that there were no sizable pieces in the quarter. I view this like your gasoline tank. Sometimes you’re not going to fill your tank completely. To the extent you don’t, you’re going to need gas more quickly. Is that a fair way to look at this?

Yeah, in some of the ones -- depending upon the ones that trigger. If it’s a -- I’ll try to use your analogy -- if they drive a Volkswagen as opposed to an SUV, then their gas tank is smaller. Boy, [indiscernible] bad analogy. But some of these -- if you have to fashion upgrades, they don’t do 100 million transactions a month. They might go from 10 to 12.

But if the underlying -- I hate to keep with the analogy. The underlying gas need -- in this case [indiscernible], et cetera -- continues to be better, the net -- you know, the net number over a period of time will be positive.

Yes.

Okay. You also mentioned with respect to Asia Pacific you are trying to address the issues there. What specifically are you doing with respect to Asia Pacific?

Without -- well, in general, what we have done -- we reorganized about 3 months ago to basically make sure that we have our entire product suite being represented across the entire region. Because we come from the BASE24 mentality, a lot of our distributors down there really only have the wherewithal or the capabilities of distributing that product. And with the investments we’ve made throughout the [indiscernible] commerce framework, we may have to rethink our distribution mechanisms, our partners, and so we’re relooking at the entire area in terms of how we go forward to promote the entire breadth of our solutions.

And this is something we should look for having an impact in the next 6 to 12 months? Is that a fair way to --

Well, I certainly am looking for more sales. Whether or not, again, that translates into revenue in terms of the P&L, you know, actually in Asia Pacific we also have some revenue recognition from the standpoint that we do a lot of things on a cash basis also. We want to make sure we get the cash. Even if we have the ability to recognize based upon the accounting principles, we want to make sure we have the cash before we [indiscernible].

Got you. You seem to have initiated an advertising program just in the last month or so, from what we can tell, in a lot of the trade rags. Can you give us any early indication on how that’s going?

Well, you mean related to the BASE24-es?

Yes.

It’s really more of an educational thing. One of the things that we found with our marketing surveys with clients as well as prospects is that we’re still predominantly known for BASE24 [indiscernible], and not everybody understands our strategy and our ability to provide multi-platform solutions. So it’s going to be one of those things that’s hard to measure the success, as always, with advertising. But it’s more of a informational type thing, an [indiscernible] thing, as opposed to specific results that we’re going to get this many reads.

And the total dollars involved, I assume, are relatively small?

Well, anything over a buck seems like a lot to me. I think in the end for our overall campaign, which will last through next year, on a [indiscernible] basis is somewhere around a half million dollars.

Okay. The -- if you’d just give us an update on the update -- or the process of the BASE-es -- or BASE24 installs so that we’ve got some sense? Those are on time? It’s a revenue recognition issue more than a timing of implementation?

In this last quarter, in Q3 results, one of the -- some of the revenue was associated with one of those clients being recognized. We have a number of projects going on. I would expect some of those would be recognized this quarter, this quarter being Q4. Some of them go into fiscal year ’05. None of them go beyond FY05. We just signed up another client yesterday here in the US, a mid-tier size organization who’s deploying it on a HP [indiscernible] system, surprisingly. We have sold another system in the Middle -- we sold a system in the Middle East last quarter, which will be our first Middle East [indiscernible]. That will be on a Sun Solaris.

So things are progressing, never as fast as we would like. There’s always moving parts. Nothing’s changed [indiscernible] implementation for our software is a 6 to 9-month cycle, even for BASE24. So it’s no different with es in terms of internal processes that have to be accommodated. The biggest difference that we have is that we won’t necessarily have all the modules that we have on BASE24 readily available on BASE24-es, so that adds some additional time. We have to go build the interchange interfaces, those device handlers that are commonly available on BASE24. We may have to build those within a given project, and that tends to elongate the 6 to 9 months a little further even.

So we are making progress, and -- well, we’re making good progress, actually. And so I’m pretty well aware of all the customer projects that we have going on, and I expect more revenue to be recognized as we go forward here.

Great. One last thing for David. Just to be clear on your tax rate, you -- when you take this deferred tax asset and you therefore are seeing a reduction in your tax rate over the next -- well, I guess in this case it’s 11 years or so -- is that correct?

No, that’s not correct.

Okay.

The -- let me add a little bit more color to this transaction. This transaction was obviously a very large transaction, and we will have a cash benefit from the deductions filed on our tax returns over the next 12 years, for approximately $1m a year. GAAP accounting requires that you recognize the entire benefit of that transaction in the quarter in which you completed the transaction.

Okay.

It’s a $12m benefit for which we’re setting up a deferred tax asset and recognizing the benefit during the third quarter. Now, the 41% effective tax rate for the fourth quarter reflects some other strategic tax actions that we’ve taken that will pull that rate down.

Okay, perfect. Thank you.

Your next question comes from Shane Diamant with Stephens Inc.

Good morning -- or, I’m sorry, good afternoon.

Good afternoon.

A couple questions for you, just kind of a follow-up on a previous call. Other than some additional advertising, can you maybe provide some more color on your selling and marketing activities? Looking -- I guess year over year they’re up about -- the expenses are up about 17%.

Yeah, okay. So it’s [indiscernible] I think last quarter we said the same thing, we had good sales. We have had two very strong sales quarters. Q1 was okay. Q2 was good, Q3 was good. As a consequence, we’re paying -- which is a good problem to have -- we’re paying more commissions. And the way we do accounting for this -- if we have commissions that are due or payable to our sales personnel based upon the sales they generate, we accrue for that in the quarter upon which the sale was made, even though we don’t have the revenue or any of that that necessarily goes along with it.

So what that increase reflects is the [indiscernible] activity. You take the Toronto-Dominion deal as an example. I mentioned that’s a 7-year commitment, a very healthy sales compensation paid to the sales personnel involved with that, revenue to be ratably recognized over 7 years. But yeah, we incurred the expense this last quarter.

And so that’s a negative, but it’s actually a positive sign when we pay. I’m happy to pay as much sales commission as we possibly can, if that makes sense.

It makes total sense. This -- kind of a follow-up, I guess, question that -- a broader look at the overall sales environment. Have you seen anything, I guess, that surprised you in the first half of this calendar year versus maybe what you expected, I guess, starting in January? And then maybe looking forward to the second half of the year, any changes that maybe you expect to see or hope to see?

Well, I guess the biggest surprise -- I don’t know if it’s a huge surprise, but a surprise was the strength of the [indiscernible] marketplace. They have had a very, very powerful year relative to sales. Asia Pacific I knew would be struggling. It’s struggling probably a little bit more than I would have expected. So that’s probably the only real big surprise. I mean, our sales have been up from last year. It’s above what our targets were so far for this year, and I expect a good Q4. And no, I don’t see anything else that’s changing. The demand is pretty steady and it’s fairly consistent. The only thing I’m hoping for is that we have some uptick in our Asia Pacific over time as we get some production from our efforts to re-invigorate ourselves down there.

Yeah, also there’s -- as it relates to Insession, the sales the first three quarters of the year have been very strong also, and maybe a little bit unexpectedly so. But they’ve had very, very good performance.

Okay, thank you.

Once again I would like to remind everyone, in order to ask a question, please press star then the number 1 on your telephone keypad.

Your next question is a follow-up from Franco Turrinelli with William Blair & Company.

Hi, it’s me again. I stopped beating my head against the wall.

Two questions. One, talking of, you know, partnership arrangements and the new products and that sort of stuff, tell us a little bit more about this Visibility deal with Insession.

Visibility deal [indiscernible].

Yeah, Franco, I don’t understand either.

Well, there was a press release -- let’s see, July 6th -- Visibility Corporation working with [indiscernible] Insession, huh?

Yeah, Franco, this is Bill Hoelting. Yeah, I do remember the press release. I don’t remember the details of it.

Okay. Well, I think you’ve answered the question. It doesn’t sound [indiscernible].

No, I will circle back to you. I think it’s -- we were moving forward with a relationship with another partner within the Insession group.

Right. But it doesn’t sound [indiscernible].

It’s early. You know, we tend to announce when we first sign, but it’s early in the relationship. So -- but we tend to announce new partnership relationships.

Okay. On a separate note, clearly we want more and more electronic transactions. There’s obviously been a lot of hullabaloo about the Check 21 Act and what that might do. The reality is that ARC conversion is a much more real and much more near-term impact. Are you seeing any kind of benefit from ARC or from other check [indiscernible] programs that we might be factoring into some of the demand for products and maybe some capacity upgrades?

Thanks.

That’s -- this is a question we get frequently. As it sits today, I don’t see any [indiscernible]. What I see as it relates to ATI’s business is that there may be more checks deposited at ATMs, points of service that we may benefit from a capacity increased -- increasing from that -- resulting from that. But in terms of the processing of the image, we’re really just a transport vehicle to get it from that device back to the software -- the storage software -- the imaging storage software back to the bank or financial institution.

So as it sits today, we have not been requested nor have we seen an opportunity to provide much value to that transaction, other than just being a transport vehicle. And I don’t think that -- maybe I have a misread of it, but I don’t think we’re hearing it from our customers that there’s something else they’re looking for from us [indiscernible] value equation.

Do you go -- an ACH transaction at some point would filter through a TSA product, right?

If the ACH -- there’s some ACH product offerings that the IntraNet business unit offers, correct.

Okay.

So it may become electronic if, you know, there’s [indiscernible] so that the volume can increase in terms of the number of transactions through the ACH system. That is a valid statement. So that may have some impact relative to the volumes that IntraNet has processing through their software.

Would an ACH transaction that ultimately needs to hit a consumer DDA also end up hitting a BASE24 system if one is installed?

Boy, I -- the answer right now would be no, I don’t think -- we don’t have ACH traffic -- the ACH traffic doesn’t typically filter through BASE24 to [indiscernible] access to the account. They have direct interfaces into the accounting systems or the core banking systems in a batch mode as opposed to online mode with us.

Okay, great. Thank you.

Once again, ladies and gentlemen, if you would like to ask a question, please press star then the number 1 on your telephone keypad.

At this time there are no further questions.

Thank you very much, everyone.

This concludes our quarter call. Thank you.

This concludes today’s Transaction Systems Architect Third Quarter Financial Results Conference Call. You may now disconnect.