ACI Worldwide Inc (ACIW) 2005 Q3 法說會逐字稿

Good afternoon. My name is Ramona and I will be your conference facilitator. At this time, I would like to welcome everyone to the Transaction Systems Architect 2005 third quarter financial results conference call.

[Operator Instructions]

I would now like to turn the call over to Mr. Bill Hoelting, Vice President of Investor Relations

Good afternoon. The participants for TSA's third quarter earnings conference call are Phil Heasley, 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 result of the company, and the forward-looking statements identified in our press releases, 10-K and 10-Q filings. The agenda for call will be as follows. David Bankhead will present the Q3 financial results and Phil Heasley will provide comments at which time we will open the call to your questions. At this time I would like to introduce Dave Bankhead.

Good afternoon. Today I will be discussing our third quarter fiscal 2005 financial results. I will start by highlighting some key milestones that we achieved during the quarter. Total revenue was $78 million, representing an 8% increase from the third quarter of 2004. Our operating income was $15.2 million, a 17% increase over last year's operating income of 13 million. The operating margin percentage of 19.5% compares with an operating margin of 17.9% for the third quarter of last fiscal year. Net income was $10 million or $0.26 per diluted share compared to 18.7 million, or $0.49 per diluted share last year.

Last year's figure included a net one-time tax benefit of $10.6 million or $0.28 per diluted share. Our effective income tax rate for the quarter was 37%. Operating cash flow was $18 million compared to operating cash flow of $23.1 million for the same period last year. Figures for both periods reflected higher than normal receivables collection activity. Our average operating cash flow over the previous 6 quarters has been approximately $15 million. Our combined balance of cash, cash equivalents and marketable securities at quarter end was $189.1 million

During the quarter, the company repurchased approximately 960,000 shares of its common stock under its stock repurchase program for approximately 21.2 million. Through the end of the third quarter, the company has now repurchased a total of 1.3 million shares for approximately $29.3 million.

Now for some revenue detail. The $78 million of revenue is comprised of the following. Software license fees of $37.7 million, maintenance of $24.9 million, and services of $15.4 million. The license fee revenue of $37.7 million was comprised of $19.2 million in initial fees and $18.5 million of monthly license fees. The recurring components are monthly license fees of $18.5 million, maintenance fees of $24.9 million, and facilities management fees of $2.9 million. Nonrecurring components are license fees of $19.2 million and services of $12.5 million. Revenues for each of the geographic channels were as follows. United States, $31.6 million; Americas international, $10.9 million; Europe, Middle East and Africa, $27.6 million; and Asia Pacific, $7.9 million.

Revenues fort three business units were as follows: ACI, $61.4 million; Insession, $10.1 million; and intranet, $6.5 million. Some customer highlights during the quarter include the following. ACI worldwide signed a top global financial institution to Base24-ES for a pan-European ATM deployment. ACI also signed 14 capacity upgrades over $100,000, 6 new customers, and expanded its relationship with 7 customers.

Insession technologies signed a significant term renewal for its ice solution with a top 20 U.S. financial institution. Additional activity for Insession including signing 3 new customers and expanding the relationship with 7 customers. Arrest par intranet worldwide signed a new top 20 financial institution customer to its money transfer solution, IMTS. Additional activity included 2 capacity upgrades, a term extension, and 13 services contracts. Our ending backlog was $223.3 million. We include in back log 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 $160.3 million and nonrecurring backlog of $63 million.

The decrease in backlog year-over-year reflects the acceptance and recognition of revenues on a couple of large projects, the timing of renewals for some long-term facilities management contracts, as well as the revenue related to some recent signings falling outside of the 12-month time horizon. We're raising our revenue and earnings per share guidance for the remainder of fiscal 2005. The assumptions we have used for our guidance are as follows: An effective tax rate of 37%; no significant change in foreign exchange rates; no projections as to the reduction and the number of outstanding shares as a result of our share repurchase program. Our revenue guidance for fiscal 2005 has been raised to a range of $306 million to $314 million, and our earnings per diluted share range has been raised from $1.06 to $1.15.

Thank you very much for your time this afternoon. I would now like to turn the call over to Phil Heasley

Thank you, Dave. And good afternoon, everyone. I am pleased with our performance this quarter, as we delivered good financial results and announced the plan acquisition of S2 systems. We expect to close this transaction later this week or shortly thereafter. The acquisition fits within our strategic positioning as a leading global provider of e-payment solutions. We look forward to working with S2's customers worldwide, as well as welcoming the addition of the talented employees of S2

Our multi-platform solution Base24-ES continues to be well accepted by the marketplace as we have signed a significant contract this quarter for a pan-European ATM deployment. ES project activity is brisk as we have over 15 active projects in various stages of implementation. There continues to be a real push in the market to reduce the incidence of fraud. We have addressed this industry challenge with 2 of our solutions.

TRM proactive risk manager and SCM smart chip manager. We recently announced PRM helped National Astoria Bank, NAB, detect a security breach at Card Systems Solutions before any bank or other financial institution. NAB uses PRM to score and monitor all aspects of fraudulent activities involving lost, stolen or counterfeit cards as well as skimming and other times of fraud.

We had very good sales activity with PRM as we signed 2 new customers Brazil, 1 in the United States and 1 in Spain. We also signed 7 existing customers to PRM solutions this quarter. PRM is the complete monitoring of detection solution for fraud and compliance, from card and account fraud to emphatic money laundering. We now have over 90 customers in 32 countries using our PRM solution. Along with the PRM activity, we have added a significant SCM customer in the Middle East which plans to use it as part of its national identity program. This is the second situation in which our solution will facilitate a national identification system. The first was in Hong Kong.

In closing TSA continues to move forward as the gold standard for single message payment. Our customers electronic payment volumes continue to grow as well as the need for fraud and smart chip solutions. We continue to gain market share even as we extend our long-term relationships with our existing customer base. We are currently celebrating several 20-year anniversaries with long-term customers.

Our solutions are helping financial institutions, retailers and processors address the issues of the day, increasing the needs for payment systems flexibility, reducing costs per transaction, managing payments, fraud, and handling ever growing payment of transaction volumes. TSA solutions form the bedrock of the global electronics payment infrastructure, with market leading levels of scalability, reliability and performance. The shift from paper to pulse continues and TSA is leading the way. Thank you for your time and your continued interest in TSA. I would now like to open it up to questions.

(Operator Instructions)

Your first question is from Shane Diamant of Stephens Incorporated.

Hi. Good afternoon, and congratulations on the quarter.

Thank you.

Dave, can you walk through some of the revenue items again? We saw kind of specifically to the line items, we saw pretty big jump in the services line, maintenance line was up a little bit, and then we also saw the license fees kind of fall off a little bit from where they were the last couple of quarters. Can you give us just some additional details on if there's anything unusual in those balances or what happened in the quarter?

Yes, Shane, there are probably 2 answers combined that explain the activity that you're talking about. We -- During the quarter, we recognized revenue on a couple of fairly large projects that we achieved acceptance on, and that release of revenue not only releases license revenue but it also releases services revenue. And that is primarily the reason for that jump that you're seeing on the services line. And as far as license fees versus a monthly license fees, you know, you always get a different mix from quarter to quarter, but we had some additional one time hits during the quarter on the capacity upgrades.

And also the large intranet deal that we did was a deferred deal.

That's right

Not a current deal. So you wouldn't see license revenue from that yet.

Then would these new contracts also drive up the maintenance revenue line this quarter or will that come later?

That will come later. But there were also maintenance revenues that were released when those projects that I referred to earlier achieved acceptance. Some of those big projects, you're deferring revenue on all three fronts, license, maintenance and services, and then they all flow through when you see kinds of blips in activity. But that aside, our overall maintance base continues to grow at the same time.

So the maintenance revenue was for pieces of the contract that you had already had installed but had to defer because of customer acceptance?

Well, we achieved the completion of the installation of acceptance, but that's correct.

And then switching over to the expense side, we saw some movements, I guess, on the cost of goods sold for the software license fee and then it looked like the general admin expenses jumped up. Anything in particular in those captions?

Well, there's nothing really too unusual in the software license fees. That just kind of goes with the activity. We have a number of corporate level initiatives and projects under way, not the least of which is 404, which is really peaking during our Q3 and Q4, and we're seeing the expense related to that. That's what you're seeing in GMA for the most part.

And you're seeing -- we told you we worked the corporate strategy. We are looking at a lot of things at one time so you're right to observe an abnormally high quarter as it relates to that.

So will those amounts stay elevated for the next quarter or so and then maybe come back down after that?

Well, you know, we're not going to necessarily make projections along those lines, but for the 404 activity, again, we're peaking, Q3 and Q4 and couple of things that Phil mentioned. Those didn't finish in Q3. We have some ongoing activity in those areas. But they do represent activity that is outside of our Norm, let's put it that way.

And then Dave, you said, if I remember correctly, the tax rate for the current guidance is 37%?

That's correct.

Any thoughts on what we could expect maybe looking out to fiscal 2006 and beyond, any big changes in the tax rates that you would expect right now?

We will talk about that a little bit later.

Ok. And then switching gears just a little bit and then I will jump off the line. Phil, can you talk a little bit about your thoughts on the competitive landscape post the S2 acquisition and kind of what you see now that you're down to, I would say 2 significant other players in the market?

Well, we're almost -- we haven't closed yet. I think there's still a lot of competition out in the marketplace. What I'm liking more and more is that we're presenting much more straight through processing solution. We're getting people to understand there are fraud and pure amp solutions as well as Base24 represent a solution, not a series of solutions and that the connectivity and the integration of those are other strategic elements of our offering. I think you're receiving the success that we are getting with TRM and we expect that to continue but we expect it continue along with the deployment of the ES-technology.

I think, just to answer your question as straightforward as I can, I think we're very well positioned from a marketplace standpoint with our offering. We feel very good about it and EMD and SEPA, you know, the Single European Payments Area -- a lot of the initiatives going around the world going from regional payment solutions to global payment solutions is really playing into our very complete solution versus a partial or a tailored set of solutions. So we feel very good competitively because we think we have the most competitive offer right now.

OK, thanks a lot.

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

Hey David, hey Phil, how are you?

Good afternoon.

I wanted to kind of drill down a little bit more on some of the issues raised on the previous question and that is to try to understand a little bit better the release of the maintenance and services fees. Correct me if I'm wrong but you're also able to defer some of the expenses that way, if I remember correctly, so presumably marketing expenses also really reflect some of that release, is that correct?

No, not the sales and marketing expense. The expenses would be in the costs of software license fees and cost of maintenance and services, and yes there would be a little bit --

So --

We do not -- Franco, we do not defer any marketing expenses whatsoever.

Okay, so sales and marketing expenses which were, you know, a little bit high, we have modeled in that quarter reflect current period sales success rather than the recognition --

Yes. That's period to period. That's same period to same period because we experienced that at the moment.

In prior quarters, you had done a very, very nice job of significantly exceeding my expectations for license fee but we had not seen the same level of associated out performance on the maintenance and on the services line. Was there something, you know, maybe a little bit unusual about these projects in terms of their complexity or something like that but had required a higher percentage of services activity associated with those license fees?

By definition, the sale of a 24-ES license is a complicated long term effort. What you're beginning to see now is that we're beginning to get a large enough inventory coming into the front that you're beginning to -- you're beginning to see them mature and coming back out the other side. So what you're seeing on the deferred revenue side now a combination of things being released out, as well as new deferrals going in. Did that answer your question or do I answer a different question?

No. That answers the question. And then a couple of things, it looks like intranet had a little weak quarter sequentially, despite the significant, you know, activity in that segment. I'm assuming it's just timing?

Well, it's largest sale was a deferred -- was a wholly deferred item

I don't remember the revenue mix in intranet. Maybe you can just remind me in terms of recurring versus non-reoccurring revenue, within intranet.

Maintenance is recurring but everything else is not.

Okay, that's right. It's not a predominantly MLF based business if I remember correctly?

That's correct.

OK. And then, again, David, help me understand a little bit better the sequential decline in backlog, particularly on the recurring side. You indicated some things that had affected that and I'm not sure I understand how we're working through to create that on the recurring revenue side

Yes, let me talk about that a little more. And my comparison was year-over-year. But some of those reasons also apply to the sequential decline from the end of Q2 to the end of Q3. Number one, these projects that we just talked about, where we release a significant amount of revenue, those were in backlog. So that takes backlog down. A little higher than normal percentage of our sales activity went into backlog outside of 13 months, so you don't get quite the same addition. I referred to some facilities management contracts and what I meant specifically by that is that we have -- these FM contracts are fairly long-term deals.

And we have one fairly good sized one and a couple of smaller ones that are up for renewal fairly soon. So, until we actually renew the contract, we don't put it all back in backlog. So those contracts have less than 12 months of revenue in them and they account for some of that drop. And then quarter to quarter, we also experienced a foreign exchange effect on our backlog with the dollar strengthening as much as it did and that knocked it down somewhat.

And we wrote down 2.9 million of facilities management backlog. Did we have that right?

Right.

Okay great. Thank you. That's extremely helpful. Thank you very much.

In our business with the amount of 60-month contracts that we do, once that 60-month contract falls below a year, it -- I wouldn't say it a (indiscernible) backlog. It just is that the backlog can be lumpy. That's one of the reasons we need both the longer and shorter view as well as looking at the recurring revenues. We have very high recurring revenues for the kinds of 12-month backlog that we carry.

That is understood, I think, collectively we're getting to understand the backlog better. I think the explanation is very complete. I appreciate that.

Your next question is from Michael Cristodulo (ph) with Inwood Capital.

Good afternoon, gentlemen. A couple of questions. Just on S2, any other specifics on anticipated closing of that deal and have you cleared heart Scott and any other qualitative feedback you can give for us the S2 customers you have contacted in terms of the transition?

There's really -- we have really made it over all of the hurdles that we need to make it over. There are still a couple of conditions outstanding relating to customers, and that's it. And we're ready to close.

Very good. Should that be this fiscal year?

No, we're hoping it's this week. We are hoping to close this Friday or worst case, a couple of days thereafter.

Very good. And the large intranet deal that you mentioned, I think it was the --one big customer in the top 20 financial institution, was that a deferred - did you mention that was a deferred?

Wholly deferred

OK. That's not because of -- that's not because of a product maturation issue, right? That was just --

It's a revenue recognition. It's following the rules of revenue recognition.

Okay so it is--?

So it's not product maturity issue. It's implementation of the product.

OK. But it's not based 24-ES but --

It's intranet that we're referring to.

OK. And lastly, Phil, any thought on the timing -- I know you were considering this 60-month backlog disclosure practice. Any further updates on your thoughts there?

Well, I really wanted to be a little further ahead than I am today. We kind of spent our time on it, too, this quarter, more than we do an the 60-month backlog. One thing I tell you, kind of going forward, is that once we put it out, we will be putting it out as a first year. Because it's pretty clear to us to standardize how we're doing it and feel very comfortable that we have apples to apples comparison. We will be putting out a number for the first 4 quarters that's not going to have a reference mark to 12 months previous, so we want to make sure that we have a good solid definition and be able to explain -- be able to explain how it operates. It's very much synching up now with the 5-year nature of our business.

I understand. Thank you for the update and congratulations on all of the progress

Thank you.

Your next question is from George Sutton with Craig-Hallum.

Hi, guys. I wanted to follow up on the last question related to the S2 acquisition. Can you just give us a sense of what you feel the market response has been or are S2's customers excited about this transaction? You obviously have some things in the pipeline being bid on by both you and S2. Any sense of how customers are viewing this deal?

I have not received any negative feedback from customers whatsoever on the deal. We have, you know, not attributable, because it wouldn't be fair-- but we have gotten some positive feedback on the -- on it taking place. And the thing about cobidding and what not, I'm not -- nothing comes to my attention as it relates to that.

OK. When the S2 deal is completed, can you talk about a break down for you on the ATM side versus the point of sale side? And the reason I ask that is because you have probably seen the same data I have seen recently. ATM transactions slowing, point of sale transactions on the debit side are increasing and ATM transactions are decreasing. Where is that going to fall out for you?

I'm not prepared -- number one, I'm not prepared to answer that question. But, two, I am prepared to state that we are very much in the debit engine business and we also drive ATM's and we drive them very, very well. And we drive an awful lot of devices. But we are not dependent on the ATM driving business as our bread and butter.

OK.

It's a feature function that, regardless of the -- regardless of whether it's growing or not growing, we have to provide gold standard to all of our customers in that regard.

You mentioned spending some money on the strategy, which made me think that potentially you have hired consultants to come in and help with the strategy is that the case?

Well, we have got some external help, not necessarily the usual suspects. I'm not going to say anything more.

And lastly, really for David, on the deferred side, you're up 26% or so year-over-year. Is a lot of that related to this intranet deal?

Are you talking about -- are you talking about our deferred revenue?

Yes.

Our deferred revenue is down year-over-year.

I'm looking sequentially. I'm sorry.

Yeah, I mean -- it's not related to the intranet deal. Remember, deferred revenue reflects cash collected, or amounts billed on revenue that has yet to be recognized. So it more than likely reflects some additional billing activity during the quarter and cash collected on projects that represent revenue in quarters beyond.

Right. OK.

But not the intranet deal.

Right. Thank you.

You have a follow-up question from Shane Diamant of Stephens, Incorporated.

Just a couple of quick follow-up questions. Do you have a number or can you provide us with an update on your status of ES contracts that are live and fully running right now?

Shane we have a couple of contracts that are alive, a handful of them. All told we have about 31 customers still or 31 customers that are ES customers, which over half of them are full ES and the other half would be the enhanced authorization. So we have a handful of them live. And we have got, roughly a number of projects in play that are at various stages of implementation.

OK. Actually two more questions. The stock buy back, you guys made really good progress with that this quarter. And now that we have the S2 acquisition, I guess, coming in the September quarter, any change in plan with the stock buy back and how you approach it?

If there was, we would make an announcement, and there has been no announcement. That's something we would denounce very formally. Things are as we previously presented them.

How much do you have under your current authorization?

About 50 million shares. $50 million rather I'm sorry. About 51 -- I think it would be about $51 million.

One final question. I ran across a press release talking about a new nonstop platform that HP -- I can't remember.

Titanium.

Titanium?

Titanium. That's their new nonstop platform

Does that affect you guys as far as the sales proposition, whether a customer wants to be with Base24 classic or Base24-ES given that hardware platform cost is coming down?

No, I don't believe that changes. One of the things we have done in terms of ES is gone to a nostic stand. And yes Titanium has come out and IBM is announcing them in another 10 days, their new platform. There's very high speed suns and Stratuses out there and what not. You know, we want to be supportive to everybody is our positioning.

OK. Thanks a lot.

There are no further questions at this time.

[Operator Instructions]

Well, if we have no more questions, I want to thank everybody and talk to you in 3 months.

This concludes today's conference call. You can now disconnect.