ACI Worldwide Inc (ACIW) 2005 Q2 法說會逐字稿

Good afternoon, my name is Miles, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Transaction Systems Architect 2005 second 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 and the number 2 on your telephone keypad. I would now like to turn the call over to Mr. Bill Hoelting, vice president of Investor Relations. Mr. Hoelting, you may begin your conference.

Thank you and good afternoon. The participants for TSA's second quarter earnings conference call are Phil Heasley, president and CEO; David Bankhead, CFO. This conference call could contain forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. 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, the forward-looking statement 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 present the Q2 financial results for TSA at which time Phil Heasley will then provide his comments, at which time we'll open up the call to your questions. Dave?

David Bankhead. Thank you, Bill, and good afternoon. Today I'll be discussing our second quarter fiscal 2005 financial results. I'll start by highlighting some key milestones that we achieved during the quarter.

Total revenue was $75.6 million representing a 1% decrease from the second quarter of 2004. Our operating income was $16 million, a 14% increase over last year's operating income of $14.1 million. The operating margin percentage of 21% compares with an operating margin of 18% for the second quarter of last fiscal year. This improvement was driven primarily by decreases in sales and G&A expenses as well as the deferral of expenses related to projects for which the corresponding revenue has also been deferred.

Net income was $11.2 million, or $0.29 per diluted share, compared to $8 million, or $0.21 per diluted share last year, increases of 40% and 38%, respectively. Our effective income tax rate for the quarter was 34.2% as our estimated effective tax rate for the year has been reduced to 37%. Operating cash flow was $15.5 million compared to operating cash flow of $10.4 million for the same period last year, an increase of 48%. Our combined balance of cash, cash equivalents, and marketable securities at quarter-end was $195.9 million. The $75.6 million of revenue is comprised of the following -- software license fees of $43 million, maintenance of $22.6 million, and services of $10 million. The license fee revenue of $43 million was comprised of $24.7 million in initial fees and $18.3 million of monthly license fees.

Revenues for each of the geographic channels were as follows -- United States, $29.4 million; Americas International, $13.3 million; Europe, Middle East, and Africa, $25.1 million; and Asia Pacific, $7.8 million. Revenues for the three business units were as follows -- ACI, $58.1 million; Insession, $10.2 million; and Intranet, $7.3 million. ACI completed its first sale of Base24-es in its Asia Pacific region to a customer in China through a systems integrator relationship.

Also during the quarter, Simtel, an organization created by the Rwandan government to modernize the country's national payments network went live with Base24-es. The Base24-es integrated payment engine is the foundation of the Republic of Rwanda's new national interbank card payments network. ACI also signed 19 capacity upgrades of at least $100,000, signed seven new customers, and expanded its relationship with nine customers. Insession signed six new customers and expanded its relationship with 10 customers. IntraNet signed one capacity and entered into term extensions with two customers. IntraNet also signed 13 services contracts during the quarter.

Our ending backlog was $230.6 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 $166.7 million and nonrecurring backlog of $63.9 million. The recurring components are monthly license fees of $66.2 million, maintenance fees of $92.1 million, and facilities management fees of $8.4 million. Nonrecurring components are license fees of $33.6 million and services of $30.3 million.

Thank you for your time this afternoon. I'd now like to turn the call over to Phil Heasley.

Thank you, Dave, and good afternoon. I'm very pleased to join you today on my first call with TSA. I am excited to be part of the team and look forward to an exciting future with the company.

I am pleased with our performance this quarter as each of our business units delivered solid financial results. We've added significant new customers, extended our global presence into new countries, and continue to lever our leadership position in the global e-payments market. I believe TSA is in a unique position of having a wide range of core capabilities to meet the emerging needs around the world. Historically, we've levered our core capabilities into geographic markets, the best example of which is the international presence of our payment solution Base24. This quarter we announced the signing of our first Base24-es customer in China. With our multi-platform solution Base24-es we continue our expansion into additional international markets. Currently, we are leveraging a number of our emerging solutions into new geographic markets.

In the international card markets, EuroPay, Mastercard, and Visa, the EMV-mandated standards are driving the adoption of chip cards. A key reason for this push, as you may know, is to reduce the incidence of card fraud. We have addressed this industry change by EMV enabling our Base24 and Base24-es product lines and investing in our smart chip manager, SCM Solution. SCM assists issuers migration to chip card through its port of chip technology and the management of multiple applications on the card. We believe these solutions uniquely position us to respond to the end-to-end needs of institutions' support of EMV standards. Interact Association, the Canadian national network for automated banking machines and debit service, recently announced its plans to convert to chip card technology. Two of our Canadian customers have already licensed EMV-compliant software from ACI worldwide. With our international experiences and our mutli-application of Smart Card solution, we believe we are well positioned to respond to this international move to chip cards.

At IntraNet worldwide, our wholesale payment messaging solution provider, we have undertaken to expand our money transfer solution by adding significant international functionality. With these types of product investments, we look for IntraNet to likewise expand its global presence. With our global reach and appropriate product investments, I believe we can continue to generate opportunities to employ our core capabilities to existing and emerging markets around the world.

In closing, with our first-half results, we are revising our revenue and earnings-per-share guidance for 2005. The assumptions we have used for our annual guidance are as follows -- an effective tax rate of 37%, no significant change in foreign exchange rates, and no projections as to the reduction in the number of outstanding shares as a result of our share repurchase program. With these assumptions, our revised revenue guidance for fiscal 2005 is a range from $296 million to $312 million, and an earnings-per-diluted-share range of $0.97 to $1.12.

Thank you and this concludes our prepared remarks. I'd like to open the call to your questions.

[OPERATOR INSTRUCTIONS] Franco Turrinelli with William Blair.

Gentlemen, good afternoon and, Phil, welcome to these calls. Just a question -- in the December quarter, there were a couple of large-ish revenue items that had been able to be recognized. I was wondering if you could just give us a sense for the composition of revenue in this quarter?

Yes, Franco, this is Dave Bankhead, and you're exactly right. In Q1 we did have a couple of large deals that made very significant contributions to the revenue line. Our revenue mix this quarter is a little bit better spread out. There's no one or two very, very large sales whose associated revenue contributed greatly to the revenue line. A little bit better spread across all lines of business.

Good, thank you, that's real interesting -- and the upgrade activity seemed to be continuing nicely. Is this a widespread effect that you're seeing or should we read anything into the recent activity?

I think what you should read into it is that we're continuing our efforts with -- I think you're probably referring to Base24-es?

Yes, I'm sorry, I was.

Yes, and I think we're continuing to progress in a most satisfactory manner there, and we're pleased, and we think we're seeing good progress around the world in terms of this new offering.

Phil, you also talked a lot about some of the enhanced functionality that you are able to offer. I'm curious as to what you're working on in the back room in Omaha right now. What kind of new things are going to be coming down the pipe from a product point of view over the next several years?

I think the project, number one, that's on our plate is Base24-es. Base24 is clearly the gold standard in terms of single-message format, and we are going to put all the appropriate effort into making sure that, from an open systems standpoint, that Base24-es is going to get to equal strength, and, as a matter of fact, be available on five different hardware platforms.

I think you're going to see us putting -- continuing our effort but putting real effort into our smart card capabilities, and we are very committed, as I said in my comments, to getting IntraNet, to getting our wire capabilities globalized.

Shane Diamant with Stephens, Incorporated.

Hi, good afternoon, and congrats on the quarter. First question I had for you, back in the first quarter we had a large contract, ES contract that you guys had received customer acceptance on, and I believe it was slated to go into live production this quarter. Did that go forward as planned?

Shane, we really haven't disclosed as to when it's going to go live yet. We were able to get it recognized in last quarter, as we discussed, but we have not disclosed yet when it will go live.

Okay, and then can you give us an update on the status of the ES installation, I guess, pipeline? You mentioned in your prepared remarks that we had the Rwanda contract go live, but can you give us an update on maybe total number that's been implemented versus total number that's still in the pipeline?

This is Phil Heasley. We can certainly answer half of it or part of it for you. We have 15 full Base24-es customers at the moment, and additionally we have 11 with enhanced authorization. So we have 15 full Base24-es customers at this point. I can't disclose our backlog to you at this point -- or our pipeline to you at this point.

Okay, and the next question on the ES, the new version of ES that was slated for May delivery -- is that still on track?

Yes. You're talking about the next release? Yes, the next release is on track.

And then Phil, or maybe Dave, if you could comment on the progress with the stock buyback in the quarter and maybe kind of what your outlook is for using that for the rest of the year?

I'll answer it. Dave can add on -- we purchased a little over 350,000 shares in the quarter and our commitment was for a little over $7 million, and our commitment -- we still have $73 million in stock buyback commitment out there, and there's no change whatsoever. We're totally committed to completing that buyback.

Do you expect the activity to be fairly consistent on a quarterly basis as far as the amount that you deploy?

That's a very hard question for us to answer.

Okay, and then one final question for Dave specifically -- the G&A line was up a little bit sequentially, in just the absolute dollar amount, and I wanted to know if there was anything one-time in nature in there. That's kind of a new level we should expect to see, going forward?

Shane, are you talking from Q1 to Q2?

Yes, correct.

Yes, because we saw rather a large decrease from Q2 last year to Q2 this year. As you know, we, just like a lot of other companies out there, are in the middle of our 404 certification, and we may see Cs associated with getting 404 compliance rise a little bit on us. They did this quarter, we'll see a little bit more of that in Q3, possibly Q4 as we get to the finish line -- outside of that, nothing really extraordinary, no.

[OPERATOR INSTRUCTIONS] George Sutton with Craig-Hallum.

First, Phil, welcome to the calls and welcome to the company. David, you deserve some great credit nobody has given you yet, but for those of us with history, you were paying 57% in taxes a couple of years back, and now it's 37%, and I think you deserve a lot of credit for that.

With respect to the backlog numbers and the deferred numbers, we've talked about contingent backlog numbers in the past. Is that anything you can address in terms of giving us a sense of is there business that you have booked that is not in your defined backlog that we can refer to on a relative-to-last-year basis?

Well, George, are you talking about the long-term backlog versus the 12 months?

Correct.

Yes, as you know, we, up until now, have not disclosed our long-term backlog. We've talked a little bit over the last several quarters specifically about some of the sales activity directly related to ES and, to a lesser extent, some of the other what we call "our C products," for which we have to defer revenue until later periods. We're still seeing a little of that, and that goes into backlog outside the 12-month period.

But no real sense on an relative-to-last-year basis, kind of how that looks from your perspective? We've talked in the past about potentially even having that as a number that you'd give out, but that's not something you're yet comfortable to do?

Let me answer the question -- it is a number I want to start providing, is the over 12-month backlog, and the reason being is that an awful lot of our business is very long-term in its nature, and I think that, to give you better visibility to our business, we're going to have to start doing that, and I'm also coming up a learning curve and, whereas, Dave has it down to a science. I want to make sure I understand the composition and the consistency and whatnot of that extended backlog.

So whether we show it starting next quarter or the quarter after, I don't know, but I am committed to doing it, and I guess what we can say is that a material number, and it's a fairly -- you know, what we know of it is that it's fairly material -- it's a fairly material number, and we will start sharing it as soon as we're comfortable.

Okay, with respect to the stock buyback, was there anything in the quarter that kept you from buying back more stock? I think most people would have expected a larger buyback in the quarter. Were you locked up at various points in the quarter?

I don't feel comfortable answering that question. I'd like to answer it, but I don't think I can tell you enough that --

Okay, fair enough. And then, lastly, with respect --

Can I say one thing about the buyback?

Sure.

I know a lot of you guys I'm new to, but I'm not new to the Street. I don't believe carrying a ton of cash on the balance sheet is a high-performing asset at all. I don't think it makes a lot of sense to carry a lot of excess cash. I've only been on board for less than a month, the last quarter, and I can't do a lot of talking about that quarter. But I ask you just to be patient for 90 days and see what our behavior is, going forward. I also want you to understand that everything else we use our cash for would have to perform -- would have to be a better investment than buying back our own stock. So it's not an area that I'm trying to -- I'm not trying to make it opaque or not talk about it, I'm just too new, and I don't want to be quoting history and whatnot. I'd rather wait a quarter and have a much fuller conversation.

Okay, great. We would agree with your assessment on the use of cash. And, lastly, with respect to SG&A, historically, we've talked about high SG&A levels as being a good thing because you pay out to your sales force commissions that quarter based on bookings. That number being lower this quarter, do I view that as a lower bookings quarter as a result?

No, I wouldn't make that connection. We are talking sales and G&A, and more of the decrease from last year to this year is really on the G&A piece of the SG&A, not as much on the sales side.

Franco Turrinelli with William Blair.

A question for you -- I guess this is something that should be out, just to leave it, maybe I'm just spacing on this -- you talked about deferral of expenses associated with the deferral of revenue. This is nothing new, I'm sure, but can you just give me a sense of exactly what's going on there?

Yes, and, again, I'll tie this back, Franco, to some of the conversations we've had in other quarters, and I may be giving you more of an answer than you're looking for. But, again, any revenue related to the implementation -- and I'm talking about license fee and service revenue -- related to the implementation of a product that is not yet considered mature, and, again, we're talking, for the most part, ES. That revenue, for accounting purposes, is deferred until we either achieve customer acceptance or first production use, and we also defer the cost, and they're primarily services fees, and, if you've noticed, our services revenue has taken a slight dip from the same quarter a year ago. And the two are interrelated. We've deferred those services revenues, and we also defer the cost directly associated with those revenues.

When we get to the point where we trigger the revenue recognition on that particular project, we will also trigger the recognition of expenses that we've deferred at the same rate that we release revenue.

And, David, I'm assuming that relates primarily, if not exclusively, to cost of software and cost of maintenance and services.

Yes.

R&D, sales and marketing, and general and administrative.

Yes, it's more in cost of services than cost of software.

Yes, and none of the three that you just -- not overhead at all.

Okay, that's a helpful clarification, thank you.

And not R&D at all.

Shane Diamant with Stephens, Incorporated.

Just a couple of quick follow-ups -- Phil, you mentioned a development effort for IntraNet. I was just wondering if there is going to be a significant or a meaningful amount of spending that's required to develop that functionality?

The answer to that is no, or to the extent that there has been a lot of it has been spent already. So this investment has been going on for a couple of years and will continue to go on, but you will not see a step-up as a result of it.

Okay, and then just maybe a broader question -- kind of your thoughts, I guess, on the sales activity and what you've heard from the various regions, I guess, relative to maybe where it's been in the last 12 months. I know you guys announced your first big product win, I think, in Asia Pacific in quite some time. So just what you're seeing in the marketplace and if that's running ahead of where it's been or pretty steady, just kind of your thoughts on that?

I think what we announced was our first win in China, but I think one of the great assets, or maybe the greatest asset this company has, is its foreign distribution system. And I think that there is a lot of opportunity associated with that. The fact that we are installed, and we're thought as highly of in so many dozens of countries, and that we're going through a logical technology shift right now in terms of being able to fly more open version of our systems as well as bringing our IntraNet around the -- you know, our IntraNet product around the world, I think we're positioned very well from a leverage standpoint. We have the investment, we have the reputation, and now we have to effectively put product through, and I think that's also true, by the way, in terms of our smart card management capabilities also.

One follow-up to that -- last quarter you guys had reported some strength, I think, especially in Europe. Is that something you once again saw this quarter?

Yes, as per our press -- Europe is doing -- the whole EMEA region is doing extremely well, and that is a continuing activity. I really believe that a lot of our future growth is offshore growth, and that's why I spent the time that I did in my comments.

Eugene Boggs with Cardinal Capital Management.

Just a question -- it looked like the revenue growth in Insession was a little bit below what it had been the last few quarters or few years -- anything there worth talking about?

This is Dave. I'm looking at the Insession revenue over the last six quarters and, from our point of view, it's relatively steady from quarter-to-quarter. Our Q2 was actually the best quarter that Insession had from a revenue standpoint since Q2 of last year, and even to that end, it's only down a few hundred thousand dollars. We generally don't see a lot of fluctuation one way or another in Insession.

Michael Cristodelew [ph] with Inwood [ph] Capital.

Good afternoon, gentlemen, I wanted to ask a couple of questions about the Base24-es. Phil, you mentioned there were 15 full customers and 11 had the enhanced authorization, and I was hoping to triangulate a bit more as to where that pool of 15 or 15-plus-11 might stand with respect to the revenue recognition topics that clearly the company has addressed a lot over the years, and, Dave, you were beginning to address those, I think, two questions ago. And specifically, my sense is there really are four levels of qualification. There may be an up-front signing payment, which is revenue recognition immediately. There is the accepting upon the product specs, which was the big revenue recognition you had last quarter, and the first quarter out of Europe. There is the going live, which you mentioned Rwanda did, but I'm not sure if -- is that, in fact, a revenue recognition milestone for that particular installation? And then, lastly, there is the going into production. I was wondering if you could just -- to the degree you can -- elaborate a bit with respect to that Base24 population of customers and where they fit in this spectrum.

Let's back up a little bit just to make sure that we've clearly communicated revenue recognition as it relates to Base24-es, I'm assuming you're talking about.

That's right.

There really aren't those four different milestones the way that you've laid them out. Until Base24-es is considered by us to be a mature product for revenue recognition purposes, the license revenue and the implementation revenue is not recognized until we get to the point of acceptance by the customer or first production use. There's no revenue recognized before that regardless of signing of contract or delivery of software or any of those kinds of things. That's where the revenue recognition on a product such as ES differs from revenue recognition on a mature product.

So, having said all that, we have this population of Base24-es projects that are ongoing, and we have achieved acceptance on some, and on those where we've achieved acceptance, we have, in fact, recognized that license and services revenue, and as we get to those same milestones on all the other projects, again, acceptance or first production use, we will recognize revenue for each of those at that point in time.

Then there is a second topic that we talked about in prior quarters, and that's the whole issue of when we feel comfortable enough that ES is a mature product, and we can accelerate the revenue recognition rules -- in other words, recognize revenue at an earlier point in time at the point of delivery of the software, assuming you don't have some other unusual kinds of things going on. That's still out there, and we have to get a number of good, solid installations behind us, without incident, before we're comfortable enough to change the classification of the product.

So the signing of the first Chinese customer or the Rwandan government going live, weren't necessarily revenue-recognition events?

The signing of the first Chinese customer is not a revenue-recognition event, because we don't have acceptance or first production use. The completion of the installation and going into production for Rwanda is a revenue-recognition point, and we've recognized the revenue on that project.

Is it of the 15 full customers, though, is it fair to say? Maybe just 10%, 15%, 20% are anywhere close to being revenue recognized again? I think we're all trying to triangulate and get a sense for the great impending revenue-recognition, over time, of this gold standard product, as you call it, Phil, and all the deferred revenue out there, and the multi-year backlog, which is, heretofore, unquantified. Any other clarification you could offer on that 15-customer base?

Well, I don't know if I'll get in trouble for saying this, but a larger portion of it is not recognized than has been recognized is a straightforward answer to you, and, yes, it's in both the short and the longer-term backlogs. Maybe even more in the longer-term backlog than the short term, but one incorporates the other, so it clearly sits more in the longer-term backlog.

And a couple of things, if I can add to that, Michael. The remaining that haven't been recognized, they're all in various states of completion, and I don't think it's fair to say that a large bulk of those are near completion or are very far out. They're spread over the next several months and next several quarters, and I know this has got to be a little frustrating in that you don't have all of the data points and specifically to Phil's comment earlier, when we get to the point where we feel comfortable enough disclosing that long-term backlog, I think that will help all of you understand this whole dynamic a little bit better.

A little bit less financial point, but it has financial implications -- Base24 is our gold standard product, and we expect ES to be every bit of the gold standard product also. We're not going to from a C to and A for purely financial reasons. We want to make sure that from a reputation standpoint we can 100-percent stand behind this ES product. We're very pleased with our progress, and we've made significant investments, and we'll continue to make significant investments, but we're not going to rush to the revenue recognition bar until we're very comfortable that we're within the gold standard band.

Just one elaboration -- Dave, you used the word "frustration," and I think most of us on this call, definitely myself, are very patient and, besides, if you could give it all to us at once, that would take the fun out of it. So thank you for your openness.

Maybe we plan to make your life a little bit less fun, then.

Well, it's a marathon, and know you guys are running it. Thank you very much for the elaboration.

[OPERATOR INSTRUCTIONS] Franco Turrinelli with William Blair.

Just one quick question, since we're on this difference between Base24 and Base24 -es -- what has actually been your experience in terms of the average size of a Base24 versus Base24-es contract or installation -- I'm not sure which term I should use -- both in terms of the license fee and in terms of the services revenue? And I understand that you won't be able to answer that precisely, then just kind of get an order-of-magnitude point of view, and, again, curious about your actual experience as opposed to you're not going to list the prices.

I think that would be a very dangerous question to give you -- if we said that there was really a difference or there really was a cluster in either one, I think we could potentially be misrepresenting ourselves. We've had a very large ES, and we have several very large just Base24. So what you have, to date, and what you're going to have, going forward, is going to associate it closer to the test you're solving, and we tend to be bank-oriented, or big-switch oriented in terms of how we approach it. I would say that you would expect -- although I'm not forecasting -- that, over time, ES is going to have as many large installations as Base24 has, and I think that's the best way we can say it. And that's not to say that we already have at least -- that we've reported to you guys one very large Base24 installation that's going to take place.

Still, I understand your reluctance to answer that, but let me phrase it maybe a slightly different way. If we were to take a large bank that would be appropriate for either of the two solutions, and there is, presumably, some overlap, is there actually much of a difference between a Base24 installation and a Base24-es installation?

No, there's not.

At this time, there are no further questions, Mr. Hoelting. Are there any closing remarks?

We appreciate your attendance on our Q2 conference call. Thank you very much and look forward to our next call, thank you.

And thank you, gentlemen. Ladies and gentlemen, we appreciate your joining us today. This does conclude our Transaction Systems Architect 2005 second quarter financial results conference call. You may now disconnect.