ACI Worldwide Inc (ACIW) 2004 Q4 法說會逐字稿

Good afternoon. My name is Ramona and I will be your conference facilitator. I would like to welcome everyone to TSA's fourth earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer period. If you like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press star then the number two on your telephone keypad. I would now like to turn the call over to Mr. Bill Hoelting, Vice President of Investor Relations.

Thank you and good afternoon. The participants for TSA's fourth 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 provisions 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 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 and year-end financial results for TSA, Mark Vipond will then discuss the Q4 and year-end 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, David Bankhead, CFO of TSA.

Thank you, Bill and good afternoon.

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

Total revenue was $69.7 million. Operating expenses were 57.4 million. Operating income was 12.3 million with an operating margin of 17.6%. Net income was $10 million, and diluted earnings per share was 26 cents.

Operating cash flow was approximately 12.7 million. Our cash balance at year-end was 169.6 million. Our 12-month backlog was 229.6 million.

The $69.7 million of revenue is comprised of the following: Software license fees of 36.2 million, maintenance revenue of 21.7 million, and services revenue of 11.8 million.

The license fee revenue of 36.2 million was comprised of 16.6 million in initial fees, and 19.6 million of monthly fees.

Revenues for each of the geographic channels were as follows: United States, $29.3 million, Americas international, 9.4 million, Europe, Middle East and Africa, 22.2 million, and Asia Pacific, 8.8 million.

Revenues for the three business units were as follows: ACI $53.1 million, Insession 9.3 million, and IntraNet 7.3 million.

Operating expenses for the quarter were $57.4 million, which is a decrease of 4.1% from those reflected in the fourth quarter of last fiscal year. The decrease is a result of many offsetting factors, the largest of which are decreases in bad debt expense, professional fees and salary expense.

Salary expense decreased as a result of restructurings which had taken place late in last fiscal year, as well as deferrals of expenses related to projects in which related revenue is deferred until future periods. These decreases are partially offset by the foreign exchange impact on operating expenses in those locations where the dollar has weakened in relation to the particular local currency during the past year.

Foreign currency losses of .6 million were recognized during the quarter and are reflected in other expense.

The effective tax rate for the fourth quarter was 15.1%, which reflects a downward adjustment from prior quarter estimates primarily resulting from an increased utilization of foreign tax losses and foreign tax credits.

Also, as a reminder, during the third quarter, the Company completed a tax restructuring which resulted in a $12 million deferred tax benefit, which is also reflected in the tax provision for the fiscal year. As a result, of our continuing tax planning initiatives, we have reduced our assumed effective tax rate for 2005 to 39% which is reflected in our annual guidance.

Now for our fiscal year results.

Total revenue for the year was $292.8 million. Operating expenses were 238 million. Operating income was 54.8 million with an operating margin of 18.7%. Net income was 46.7 million, and diluted earnings per share was $1.23.

Operating cash flow was 57.3 million. Again, resulting in a year-end cash balance of $169.6 million.

As I mentioned during last quarter's earnings call, we continue to license an increasing percentage of our emerging products. Recognition of revenue on these transactions is generally deferred in many cases beyond 12 months from the date of original booking.

These deferred revenues may not be fully reflected in the balance sheet accounts nor in the 12-month backlog, but are expected to build revenue streams in years beyond 2005.

As sales of our newer products continue to make up a larger percentage of our total product sales, these deferred revenues will increase until such time that these products are accepted by the customer, or first used in production. Once these products achieve maturity in the marketplace, revenues related to new sales of these products may qualify for earlier recognition.

Our ending backlog was $229.6 million. 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 168.1 million, and non-recurring backlog of 61.5 million.

The recurring components are monthly license fees of $69.4 million, maintenance fees of $87.9 million, and facilities management fees of 10.8 million. Non-recurring components are license fees of 36.7 million, and services of $24.8 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 fourth quarter results for ACI Worldwide.

ACI's revenue for quarter was $53.1 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 19 customers. These upgrades took place in all of our geographic regions with some of our largest clients. For fiscal year '04, ACI had 54 capacity upgrades over $100,000.

ACI licensed products at ten new customers in the quarter. Those products include one BASE24, one Payments Manager, three Proactive Risk Manager, two WINPAY24, one e-Courier, and two BASE24-es licenses.

We are pleased with this level of new customer signings and it brings our total number of new customers in FY '04 to 39.

ACI licensed 17 new applications to existing customers during the quarter. These included licenses of our BASE24-es, BASE24-es Enhanced Authorization system, Congress Gateway, Automated Key Distribution system, Proactive Risk Manager, Payments Manager, Smart Chip Manager and new BASE24 add-on products.

For fiscal year '04, ACI licensed 49 new applications to existing customers.

As our Company goes forward, there are a number of factors influences 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 opportunities with our multi-platform, ACI Commerce Framework Solution set.

We expect merger and acquisition activity among financial institutions to continue. How these deals impact us depends upon which institutions are involved in their selection of the EFT processing system.

We believe that activity to replace in-house support of EFT solutions will continue as financial institutions and processors respond to mandatory and market-driven changes.

We believe that sales for some of our emerging products including BASE24-es, Smart Chip Manager and Payments Manager, will make up a larger percentage of our new sales.

In summary, we believe we were well-positioned in the EFT software market with our current product offerings.

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

Thank you, Mark. Good afternoon.

I'm pleased with our 2004 financial results. For the fiscal year, our revenue increased 5.6% over last fiscal year, and our operating margins increased from 12.7% to 18.7%.

Net income for the fiscal year was $46.7 million, or $1.23 per diluted share, compared to $14.3 million, or 40 cents per diluted share, up 226% and 208% respectively. Operating cash flow in fiscal 2004 was 57.3 million, compared to operating cash flow of 38 million for fiscal 2003, an increase of 51%.

We've made very good progress against our tax planning initiatives. Those initiatives began in the second quarter of 2003, when our effective tax rate was in excess of 60%. As Dave mentioned, our effective tax rate for fiscal 2005 is projected to be 39%.

Our balance sheet continues to reflect our financial strength with cash from approximately $170 million and very little debt. As our cash position continues to build, we continue to seek external growth opportunities.

We are looking for opportunities to leverage our international direct sales and delivery channels. We are also looking at stand-alone complimentary companies.

As many of you know, business valuations today reflect high premiums, but we continue with our disciplined approach. We remain activity in our business [filiment] activity and continue to evaluate strategies to enhance shareholder value.

I announced my plans to retired June 30, 2006. With my announcement, the Board of Directors has commenced a search for an experienced leader with a prudent record of performance to succeed me.

I'm very proud of the accomplishments of TSA over the last couple of years. The Company is well-positioned with its financial strength and market-leading position. I want to continue to build on these accomplishments as we enter fiscal 2005.

In closing, we are initiating our revenue and EPS estimates for fiscal 2005. Assuming an effective tax rate of 39% and no significant change in foreign exchange rates, our fiscal 2005 annual revenue estimate is 279 million to 308 million. The estimate for fiscal 2005 earnings per diluted share is 79 cents to 94 cents.

We thank you for your continued interest in TSA. At this time I'd like to open up the conference for questions. Thank you very much.

At this time I would like to remind everyone if you wish to ask a question, please press star, then the number one on your telephone keypad now. We'll pause for just a moment to compile the Q&A roster. Your first question is from George Sutton of Craig-Hallum.

Hi, guys. I wanted to see if you could help define what you mean by maturity in the marketplace or at least what the accounting rules suggest because I know they're a little different than we would have originally expected.

I'll go ahead and answer that. I'm assuming you're talking about mature products versus emerging products?

In other words, when can you begin to book these newer products? How many customers need to be accepted? Or if you can run through how the rules sit from your perspective.

Yeah, first of all, the rules aren't fixed on exact numbers of installations. The effect of the rules for revenue recognition on products is the following. If a product is proven in the marketplace and deemed proven in the marketplace by the Company, and we have guidelines that we operate under to determine when the product moves from an emerging product to a mature product, you can in most instances recognize revenue when that product is delivered, assuming you've got a fairly simple contract with no other extenuating circumstances in place.

If the product is not a mature product, if it's still an emerging product, in the same set of circumstances, you really need to wait until you gain customer acceptance of that installation or first production use before you recognize the revenue.

So George, this is Mark Vipond. We have a fairly rigorous process that we go through on all of our products that we categorize them. We'll either call Category A, which means they're recognizable on delivery, excluding any special circumstances as Dave referred to, or Category C which is on acceptance or first production use.

And as you can imagine when you have a product that has a lots of different platforms that it runs on, different databases, there's a variety of factors that go in and make the determination, do we have a based [inaudible] code that we have a proven history with, as well as the customers have a proven payment history with. So it's not rote by any stretch of the imagination in terms of so many installations.

So, in this case if you win a BASE24-es IBM platform deal, and then you separately win a UNIX deal, those would not be deemed the same sort of customer acceptance? They would be separate and therefore you need other installations under those platforms to recognize revenues?

Well, we have kind of gone through our processes. BASE24-es in its entirety right now is a Category C, which means we accept, we recognize on acceptance or first production use. And we have certain things that we are looking for to make a determination that it would be a Category A for the core base product.

That will take some time for us to have the confidence that we have actually achieved Category A status. So it's not necessarily up to the UNIX or and IBM mainframe, but that certainly factors in. We would like to have customers live on all the available platforms to make an assessment that it is a Category A product.

Okay, And then try to understand your guidance for next year or for the current fiscal year we're in. I'm trying to get a sense of what are you looking for from a, if we assume a traditional BASE24 deal is a 5-year deal and you take 50% of the license up front and book the rest over five years, is that still true or has that changed a bit using generalizations?

Our licensing practices?

Yes.

Typically, you know, most of our licensing practices which have been in place for a number of years is, we attempt to sign up a five-year term and we tend to try to get the customer to pay a paid up front fee for that five-year usage exclusive of product support fees for the use for that five-year term.

So if it's a BASE24 classic situation, it's a Category A, typically you would take that paid up front fee upon delivery, the BASE24-es, as it sits today, that revenue would be taken once you have been deemed to have achieved acceptance from the customer, which could be anywhere in the next, who knows, 6, 12, 18, 24 months, depending upon the length and the issue associated with the project deployment.

Okay. I also wanted to better understand what you term enhance shareholder value. What, if you can give us a better picture into what you're looking at. I know you've been sitting there with an increasing cash position and you've looked for acquisitions for a while. Are you, do you feel you're any closer to finding things that you're interested in or are you more likely to begin to look at other things like buy backs?

Well, George, I think we'll look at both situations. Yes, we have looked at quite a few things and as I mentioned in my script evaluations from some of these organizations have very high at this point in time and we're just not going to go off and harm the Company in that fashion. So, yes, if we cannot find the appropriate things we'll look at other alternative uses of the cash.

Is there is a candle somewhere that's burning that the wick's about to run out or what is the Company, what is the board sort of viewing as a time frame for this?

Well, I wouldn't say the board is viewing anything at this point in time. I wouldn't make that suggestion. It will be absolutely a consideration of the board at the next board meeting as to what we're going to do and how we're going to utilize the cash.

Okay. Thanks guys.

Your next question is from Franco Turrinelli of William Blair and Company.

Gentlemen, good afternoon. Mark, building on George's question, can you help then us understand a little bit better how to interpret the relationship between recognized revenue, backlog, and the deferred revenue that we're seeing on the balance sheet? I ask partly because all of those items are essentially flat sequentially and trying to reconcile some of that with also some of Mark's commentary on the sales success. Thanks.

Sure. I'll give you my take and then David can pipe in if he likes. I mentioned, as we sell more emerging products, newer products under Category C, it has a tenancy to push the revenue out. There's even tremendous more complications relative to this in terms soft revenue recognition rules that if we sell BASE24 Classic with a Category C product, so we sell our entire ACI Commerce framework, you basically are all left to the, whatever the weakest link is, is what you're acceptance criteria.

So I have situations where I sign the BASE24 Classic customer with a Payments Manager add-on product, and as a consequence, the whole thing is deemed to be recognizable when the Payments Manager product is recognizes. Which again, is going to be on acceptance or production. All of which has a tendency to push the revenue out into the future at some point.

We have another factor that's going on which I think we tried to describe last time which is hitting us front and center is the issue of ratability. The complexity of the deals that we're signing, because we are trying to market the entire breadth of our product line, there's lots of intricacies and inner play between products. We're selling services along with them.

In some cases, and I can give you some very practical examples, when we sell these big deals, and we mentioned this last time with the Toronto-Dominion deal we signed with HP. I'll give you an example. Here's a customer that is paying us approximately $100,000 a month for the use of our software and has been paying that for a number of years. When we signed that contract at the end of June, because of the intricacies involved, it was deemed that the new stuff that they signed can't be recognized until we meet a certain delivery criteria.

But not only can we not recognize that revenue, we also cannot any longer recognize the revenue that they continue to pay us for day in and day out. So what happened was, all of a sudden the revenue that we were getting from that client went out of our backlog, it impacted our earnings this quarter, it impacts our view for the next 12 months, and then eventually, it's going to come back and it will come back ratably over the term of the agreement which is seven years.

So this wonderful deal we signed, quite frankly, had a negative impact to our result s this year and will have a negative impact to our results next year because of the way the accounting rules of work these days.

And we had another example of a similar type of situation in one of our large accounts over in Europe. So we're not going to stop selling the complete picture. The breadth of our solution that's the right thing to do and we're going to have to try to manage around the short-term implications that it has on our business. And it does have implications.

So, I'm not trying to make excuses, that's just the reality we have to deal with today and some of those things are very hard to predict that they will actually be read that way in terms of the revenue recognition rules. But that is some of the impact that you are seeing, Franco, in terms of this quarter's revenue, the backlog and some of the metrics, there are a lot of moving parts that go into all that.

Right. And I think, well, for those of us that have been around awhile, I think we understand the backlog fairly well with the 12-month kind of cut off. I guess I don't feel that I really understand the deferred revenue balance quite as well, so maybe Dave, could you help me understand that a little bit better?

Franco, I'll do my best. You know, obviously we're talking about a very complex inner relationship between a lot of things. And as these agreements have become more complex that we're entering into and involve newer products, I don't really need to add much to what Mark said around the whole issue of what we're dealing with in terms of revenue deferral.

But that revenue deferral can show up in a lot of places. We have seen deferred income balances net. And when I say "net", netting the short-term and the long-term over the last 12 months go up by $10 million, and that reflects monies that we've either billed or billed and collected for which we haven't recognized the revenue yet for varying reasons and Mark touched upon those reasons.

We also see revenues that are not yet to be recognized in the 12-month backlog and they may or may not show up on the balance sheet depending upon whether or not we've billed and collected monies.

And then the third component of this that we're seeing more of as we enter into deals where we recognize revenue out beyond the next 12 months, is that we don't even see that portion of revenue in the 12-month backlogs.

So I guess the message that we're trying to deliver here is that we are continuing to book good business, business that involves a lot of our newer products, es in particular. And you don't necessarily see the optics of booking that business either in deferred income or in current backlog because it goes out beyond that 12-month period.

Dave, you'll be surprised to know that I found that extremely helpful. And actually less confusing.

Hey, Mike, going back, well actually, I thought just Mike, but across the board and I do realize that some of this is just revenue recognition, but across the board things just seemed a little bit lighter sequentially and again that's in contrast to the seasonal pattern that we used to enjoy. Can you kind of give us the feel behind the numbers? I mean, often the fourth quarter has been a strong one for you as the sales people have worked hard to get their quotas filled and as customers have made investments ahead of the holiday season. So again, can you just kind of give us the feel for the numbers behind the numbers?

Sure. From a sales standpoint, I would say we had a good quarter, not an exceptional, Q3 was actually a bit better for us. So the seasonality, we've been telling you the seasonality relative to the revenue recognition has definitely changed this year that the sales in Q4 were on par with Q3's, but Q3 was an exceptionally strong quarter.

So I would say the activity level is steady. Europe had a great year, EMEA had a great year [inaudible], Americas was a little bit below the plan, and Asia/Pacific was weak.

Now going into this next year, I expect that we'll have a pretty, I mean, the outlook looks to be about the same in terms of the production and Europe looks still strong. Asia/Pacific is starting to pick up in terms of activity, based upon some of the restructuring efforts that we've done and refocusing on our new distributors and different distribution channels in the region, and the Americas is probably still the one that I'm not quite sure of as to how it's going to end up, but there's some good RFPs out there.

So the mix of business is strong. There's activity out there. And so I expect from a sales performance that we'll have a consistent level performance this next year, and this last year was pretty decent.

The revenue recognition is frustrating as all get out for us running the operations in terms of trying to predict that. As you can see, in terms of the guidance it's very challenging to project it and there's a lot of things that go in and out of that equation.

But as I said before, at the end of the day we just want to run the business the best we can and as we instruct our folks, we'll deal with the revenue recognitions on the back side, just get the business done in the best way possible for the Company.

Thanks, Mike. I'll let someone else jump in and maybe I'll come back. Thanks.

Your next question is from Shane Diamant of Stephens, Inc.

Hi. Good afternoon. On your BASE24s ESLs, did you have any new contracts actually go live and up and running in the quarter?

We had some more of our add-on customers go live. Quite frankly, we have slate of them probably within the next two to six months that's [inaudible] the we worked on for sometime are anticipated in going live. We just certified today with one of our customers with one of the interchange networks in the U.S. so they would hope to start putting that live into production in the best case will be November time frame, realistic will probably be January 1, or maybe December, because of the holiday freeze that the interchanges put in force. So yeah, we're moving forward.

In terms of the last quarter we just had some of our enhanced authorization customers go live.

And then the revenue coming in from BASE24-es that you're actually able to recognize has been fairly limited?

Pretty limited.

Okay. Looking forward to the guidance for next year, any specifics there that you could give us about what you expect for BASE24-es-related revenues that will actually come in to be recognized?

We don't publish that data. Actually, I don't even have our own projections in front of me as to that. In fact, I mean, we project internally what our sales are. But again, it's so hard with the, because you think about a customer can put a delay on a project for whatever internal reason and then things just push out and that is happening to us.

It's all the things that can cause a delay until that customer accepts or goes into production, we are left in limbo relative to revenue recognition. So no, I don't think we actually, I would even feel comfortable giving you a [inaudible] prediction for the revenue on BASE24 [inaudible].

So Mark, is es going to go other than these enhanced products, are we going to get somebody live in the December quarter?

Well, we already have somebody live. It's just a peer es customer, has been for quite sometime.

But some of these big sales that have been in the backlog, are we going to get some of that flow through in the December quarter?

I would say I hope so but I won't guarantee it. I won't guarantee it. It could be the Q2 or the January quarter.

And then David, couple questions for you. For the guidance for '05, what are your assumptions there for share count?

We assume a little bit of a rise in share count, but we, I don't have the exact figure in front of me. We worked it up a little bit based upon historical increases.

And then walking through your tax numbers for this fiscal year, trying to, I guess, back out the trueups and the amounts that were in the third quarter, based upon my calculations, I came out at a 37% effective tax rate. That would imply, I guess, an increase going into '05 with your guidance of 39%. Is that the right way to look at it or am I missing something there?

I don't think you are missing anything on the numbers. We try to be cautious in predicting the effective tax rate on a going forward basis and it very well could end up being lower than 39%. There are just so many factors that can affect that effective tax rate and some of them are fairly large, such as our appetite for foreign tax credits, foreign NOL carry forwards and those kinds things.

So, we believe that we forecasted a reasonable number at 39%, obviously we'll look at it each quarter. We're required to look at it each quarter and adjust it accordingly. But the numbers you came up with are about right.

And do you have any amount for depreciation and amortization in the quarter? Do you have those numbers yet?

I don't have that number right in front of me at this point. We haven't released the cash flow statement, that will come out with the K.

Okay. And then one final question. For Sarbanes-Oxley compliance, is that a fiscal year '05 issue that you guys will have to address or have you been working on that already?

Oh, we've been working very, very hard on it already. And, yes, our deadline for being in full certification for Sarbanes-Oxley is 9-30-05. But that's a process that began here long ago and we're right smack dab in the middle of it right now.

Okay. Good luck with that.

Thank you very much.

Your next question is from Michael Christadalu with Innwood Capital.

Good afternoon, gentlemen. I wanted to ask about your '05 projections. Is it fair to say you've used your prudent business judgment on sales and software and licensing mix to drive all of these projections?

Yeah. I would say Mike we have. I mean there's a lot of considerations we take into account basically being the marketplace, M&A activity, basically, absolutely the accounting for revenue recognition, so all are part of the consideration pipeline, backlog et cetera, et cetera.

And clearly you're juggling a complicated mix of inputs and I guess, I'm observing that you're going to have a slightly down to slightly up revenues year-over-year, flat to slightly down EPS, and yet you probably are going to generate a lot of cash. Is there anyway given the, again, given that it's a spot estimate subject to change. What could the projected cash generation be if you make that range of estimates for next year?

We have not done a cash flow projection, but we'd anticipate that if we hit our numbers appropriately, if the contracting goes the same way and we're collecting cash, it should be approximately the same range as this year, but we can't tell you that for a fact.

Okay. But I mean, it could be another 50 million plus of free cash generation potentially.

Potentially.

Okay. Gotcha. Well, gentlemen, it's a marathon, not a 100 yard dash. Keep up the good work.

At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad now. There are no further questions at this time. Sir, do you have any closing remarks?

We'd just like to thank everybody for their interest in TSA and we look forward to fiscal '05. This concludes our earnings call for fiscal '04. Thank you.

Thank you.

Thank you for participating. You may now disconnect.