ACI Worldwide Inc (ACIW) 2005 Q4 法說會逐字稿

Good afternoon. My name is Miles, and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Transaction Systems Architects, Incorporated fourth quarter and fiscal year 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 session.

[OPERATOR INSTRUCTIONS]

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

Mr. Hoelting, you may begin, sir.

Thank you, and good afternoon.

The participants for TSA's fourth quarter and fiscal 2005 conference call are Phil Heasley, CEO, and 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 and the forward-looking statements identified in our press releases, 10-K, and 10-Q filings. The Company assumes no obligation to update any forward-looking statements made during this call.

The agenda for the call will be as follows -- Dave Bankhead will present the fourth quarter and fiscal 2005 financial highlights; Phil Heasley will then provide his comments, at which time we will open the call to your questions.

At this time, I would like to introduce Dave Bankhead.

Thank you, Bill, and good afternoon.

Today, I'll be discussing our fourth quarter and fiscal year 2005 financial results. I'll start by highlighting some key milestones that we achieved during the quarter.

Total revenues were $79 million, representing a 13% increase from the fourth quarter of 2004. Our operating income was 11.1 million with an operating margin of 14.1%. Net income was 9.1 million or $0.24 per diluted share, which reflects restructuring charges of $0.02 per share, compared to 10 million or $0.26 per diluted share last year.

The $79 million of revenue is comprised of the following -- software license fees of 40 million; maintenance fees of 23.8 million; and services of 15.2 million. The license fee revenue of 40 million was comprised of 21.9 million in initial fees and 18.1 million of monthly license fees.

Revenues for each of the geographic channels were as follows -- United States, $29.8 million; America's international, 12.6 million; Europe, Middle East, and Africa, 26.1 million; and Asia Pacific $10.5 million.

Revenues for the three business units were as follows -- ACI, 60.6 million; in session, 11.4 million; and Intranet, $7 million. TSA signed 12 new customers during the quarter and added 24 applications to existing customers. With the quarter activity and the integration of S2, we now have over 815 customers in 84 countries.

Business unit activities for the quarter are as follows -- ACI added seven new customers. Highlights include the signing of three new customers to Base24-ES; a new Base24 customer; a smart chip manager customer; and two new Win Pay 24 customers. ACI signed 18 capacity upgrades of at least $100,000 and expanded it's relationship with 17 customers. In Session added five new customers and licensed seven new applications to existing customers. Highlights include two new customers through its distributor relationship with Golden Gate Software for its transactional data management software solution. Intranet Worldwide signed a new five-year extension with a top-20 US bank and licensed additional transaction capacity to a top-20 world bank.

On October 5, we announced the combining of our three business units into one operating unit designed to create more market focus, better operating efficiency, and strategic acquisition integration.

Operating expenses for the quarter were $67.9 million, which is an increase of 18% from those reflected in the fourth quarter of last fiscal year. The increase includes the following items -- S2-related expenses of $3.1 million; increased sales commissions and related selling expenses of approximately 2.5 million as a result of a very high sales quarter; Sarbanes-Oxley compliance costs and other corporate initiatives totalled approximately $0.9 million; and special charges of 1.2 million related to the reorganization of the Company's business units.

The effective tax rate for the fourth quarter was 23%, which reflects a downward adjustment of the annual rate from 37% to 34.6%.

Operating cash flow was $4.8 million compared to operating cash flow of 13.4 million for the same period last year. This reduction is primarily a result of the timing of cash collections and the cash effect of the initial integration of the S2 acquisition.

Billed receivables at September 30 were approximately 63.5 million, compared with the June 30 balance of approximately 45.8 million, which is an increase of $17.7 million.

Our combined balance of cash, cash equivalents, and marketable securities at quarter-end was $156.5 million, which reflects the 35.7 million paid during the quarter for the S2 acquisition.

Our 12-month backlog was 242.6 million at quarter-end.

During the quarter, the Company repurchased 156,154 shares of its common stock under its stock repurchase program for approximately $4.1 million. Through the fourth quarter, the Company has now repurchased close to 1.5 million shares for approximately $33.3 million.

As mentioned earlier, our ending backlog was 242.6 million. This reflects an increase of 19.3 million from last quarter. Reflected in this increase is 11.3 million related to the S2 acquisition.

We include in backlog all fees specified and signed contracts to the extent we believe at this time that recognition of the related revenue will occur within the next 12 months. Backlog is comprised of recurring backlog of 173.8 million and nonrecurring backlog of $68.8 million.

The recurring components are monthly license fees of 63.2 million, maintenance fees of 97.9 million, and facilities management fees of 12.7 million. Nonrecurring components are license fees of 36 million and services of $32.8 million.

Now for our fiscal year results.

Total revenues for the year were 313.2 million. Operating expenses were $248.7 million. Operating income was 64.5 million with an operating margin of 20.6%. Net income was 43.2 million and diluted earnings per share were $1.12.

Operating cash flow was $53.2 million, again, resulting in a year-end combined balance of cash, cash equivalents, and marketable securities of 156.5 million.

We are initiating our revenue and earnings per diluted share guidance for fiscal 2006. The assumptions we have used for our guidance are as follows -- an effective tax rate of 35%; no significant change in foreign exchange rates; no projections as to the reduction in the number of outstanding shares as a result of our share repurchase program; an increase of 4 to $5 million in product development spending; and the planned expensing of stock options under FAS 123R. Our revenue guidance range for fiscal 2006 is 340 million to 358 million, and our earnings per diluted share range is $1.32 to $1.46.

Thank you very much for your time this afternoon.

I'd now like to turn the call over to Phil Heasley.

Good afternoon, everyone.

TSA had a good quarter and a good year. We appreciate the efforts of our highlight committed employees towards making this happen. As you know, we just celebrated our thirtieth anniversary in business, a true testimony to the staying power of our products, our intellectual capital, our model, and our customer relationships.

Now that you've heard some of the details on the first -- fourth quarter and fiscal year from Dave, I'd like to spend a few minutes talking about some of the key aspects of the business in preparation for our next year.

As you've heard me say, TSA's solution represents the gold standard for single message format payment processing. Our mission for converging electronic payment has been strengthened by a recent reorganization where we're combining the unique capabilities of our three companies to offer a single end-to-end payment solution.

No other company has the assets that we have to address what we believe is an eminent market need. We believe that the cost to customer service, risk management, and marketing advantages that can be driven by the creation of highly scalable re-useable payment platforms will be compelling for our customers, and we can deliver it on a global basis through our unique distribution channels.

We closed the S2 acquisition during the fourth quarter. I'm happy to say that we've moved to a business as usually status with the S2 assets. Nearly all operational and staff functions have been integrated into ACI, and we're actively engaging S2 clients and partners on a daily basis.. As you know, we fully expect to realize the accretive value of the S2 acquisition in full-year '06.

Early in October, we announced the re-organization of the company into one operating unit, ACI Worldwide. This reorganization was in part a direct result of listening closely to our customers who wanted to deal with one strategic supplier across the enterprise. With the new structure, we will able to get closer to our customers and offer them a more integrated set of dissolutions for payment processing, transactional authorization, authentication, and risk management.

As part of the re-organization, we noted the formation of a serve -- software as a service group. We're very interested in expanding our portfolio services based, revenue streams, and customer engagements. We're working with several key partners and looking at new go-to market ideas as well as structuring more options for existing customers to use our solutions.

Financially, we expect the software service group to lever our unique solutions and generate additional sources of recurring revenue and enhance profitability. And finally, we plan to create a first customer platform that we can use to test new solutions and enhance the overall quality of our offerings.

Overall, we believe the key market drivers for our business are sound and in some cases accelerating. Electronic payment volumes continue to grow around the world driven by cost and consumer acceptance dynamics. Recent studies show that in the US, debit transaction volumes at the point-of-sale now exceed credit card transaction volumes, and we're seeing debit card use driven into more high-volume settings like fast food.

As Dave noted, we've signed 18 capacity upgrades over $100,000, a direct result in increases in transaction processing volume, requirements by our customers around the world. The need for enterprise-level risk management, fraud detection, and anti-money laundering is accelerating, and in some cases, driven by industry or country mandates.

TSA now has over 95 installations of our enterprise fraud detection solution, Proactive Risk Manager, or PRM. Chip technology is rolling out around the world and will become more prevalent in the United States as well. In addition to it's smart chip manager product, which is used in bank-sponsored smart card deployment, TSA also offers a wide range of solutions that support secure authentication of customers and transactions, a key factor in helping reduce payment fraud. Increasingly, banks and retailers are looking at long-term partners to provide these solutions in a value-added trust-based relationship.

As you know, in large part, TSA is a recurring revenue business. Often that -- this means that revenues under customer agreement accrues over extended periods of time instead of in the current period. Currently, on a quarterly basis, we present backlog expected to be recognized within the next 12 months. However, we believe that it's appropriate to look at our business on a longer term basis as well, coming back to the recurring nature of the business.

We plan to report 60-month outlook for backlog as part of our quarterly financials. We'll start reporting our 60-month backlog at the end of fiscal quarter 1 '06, and, at that time, give you two historical quarters in which to do comparisons. To do this, we'll be making key assumptions in our forecasts. Included in our assumptions will be historical customer retention rates and contract renewal history. We will not try to forecast the impact of payment transaction volume increases, annual maintenance rate increases, or bank consolidations.

We think this will be a good way for you to understand the value of the business, and to some extent, look at the business the same way as we do based on a longer term run rate basis. We used the 60-month backlog as a long-term indicator of our business, and therefore, it becomes a tool in our planning process. Stay tuned for more on this in full year '06.

In summary, TSA is performing well. We're delivering strong profitability, cash flow, and our balance sheet is solid. We look forward realizing the benefits of our recent structural moves, capitalizing on our strong product offering, and positive market dynamics. With that, we'll turn it over to questions.

[OPERATOR INSTRUCTIONS]

Your first question is from the line of George Sutton with Craig-Hallum.

Hi, guys. Nice quarter.

I want to try to triangulate a few things. You mentioned that you had a fairly significant increase in sales commissions. You had three new Base24 customers -- Base24 Yes customers -- and we obviously saw a material increase in the backlog. Am I putting those three things together to suggest you signed some large Base24 deals?

I think it would be -- that would be partially accurate. I think it would be fair to say that we signed several long-term deals, some of which were Base24. There were some other large deals in it that are not Base24. There's a very large PRM deal in there too.

With respect to the accelerated product buildout that you've gone through this year, and you've also talked about building more aggressively next year Base24 platform, and then you've also talked about creating this single end-to-end payment solution -- can you give us a sense of how far through that process, if you will, you are towards the holy grail of that single message platform?

I think that we are 24 ES, it's an open system project has been a long -- I wouldn't say expensive. I would say we've invested a lot of money in it, and we're going to get some very good outcomes from it.

Convergence, which is the term we're using for moving more towards the single platform, convergence will not begin in a meaningful and in a construction kind of manner other than thought leadership and listening to a lot of customers who have input on it too. We feel that we are largely -- largely through with Base24, yes, and I think the big signal there, George, would be when 124 goes from its current less-than-mature status to -- it's officially designated a mature system.

Okay.

With respect to to your guidance for next year, you're building out or beginning to build out a software-to-service platform. Obviously, your revenue recognition on that might be a bit different. Can you discuss how much thought went into growing that business into 2006?

Yes. I think it's fair to say that we are not projecting any large revenues or expenses in next year's numbers for that. Next year is more of a -- we have several potential partnerships as it relates to that business or several potential approaches, and we're still working the approach-side of that. We're not relying on that to deliver our guidance for next year.

Last question -- with respect to to the S2 acquisition, and you're obviously starting to see a nice resumption in business wins. How much of -- how many of your recent wins would you account towards that deal? In other words, people might have been looking at one or the other platform, and with the two combined, it became obvious, you were the answer?

Well, my commission sales force would tell you zero. So I'll give you their official answer.

It's really hard -- it's really hard to say whether we would have -- whether we would have been the winner out of four people bidding. Now we're the winner out of three people bidding on the deal. We know it didn't hurt, and we know we have a lot more talented resources as a result of bringing the S2 people in to consummate -- consummate these deals. So, that's about as quantified as I can be.

Okay.

Thanks for the help.

Okay, George. Thank you.

Your next question comes from the line of Shane Diamant with Stephens, Incorporated.

Hi. Good afternoon.

Just one follow-up question on George's question on software and services offering. Have you thought much yet or quantified what the target focus group will be for that offering either by customer size, maybe region of the country? What it might be, or where it might be targeted at?

You know, Shane, we're not really looking to do a target, a pilot or a target kind of program, so we're not looking at a piece of geography in the United States or the world. We actually do a certain amount of that business today because our customers ask us to do it. We have in queue dialogues -- we have dialogues in queue with several of our customers, and our customers are more large than small, who are interested in dialogue in this fashion. As we said in our press release, we also are in conversations with several -- with several vendors and several processing customers -- let's put it that way -- in terms of -- in terms of a more combined offering in the marketplace. So I think if we -- when we go out, we'll probably go out in a multi-pronged fashion, and we will go out probably with capital-rich partners in terms of how we do it

Okay. Fair enough.

And then on -- looking at your selling and marketing expenses, is there any way to -- I guess the increase there that we saw in the quarter -- is there any way to maybe quantify -- I know because of revenue recognition, a lot of the times, these long-term contracts take a while before they're in the backlog numbers. Is there any way to look at that, and say, well, the sales this quarter -- X percentage -- fell within the backlog number? Anything you can give us?

We don't give sales numbers, and we are going to give a 60-month backlog. I think that 12- and 60-month backlog will create a very -- it'll great an entrance at a goal post. One is very -- one is very strictly risk-adjusted and whatnot, and the other one is very much -- is a -- is a gross indication of recurring revenue. It's the way they're going to land up coming up, and I think you'll see -- you'll be able to see movements in one or both of those that will be fairly indicative of what's going on, and we have no complaints.

I would address your revenue rack. We have no -- that number had nothing to do with revenue. Disappointment in revenue recognition -- we were happy in terms of how everything was recognized for the quarter.

Okay.

Then a couple questions for David. Can you tell us or give us details on the $1.2 million of charges in the quarter as to which line items were affected by those charges?

Those charges, Shane, were spread throughout the line items on the income statement depending upon what groups were affected. The charges were primarily related to the severance and benefits paid to -- as a result of a reduction in force, and it was spread across all business units.

So is that in the cost of goods sold line, or is that more in the operating line?

It's in cost of sales. It's in G&A. It's in sales and marketing.

Okay.

And then, will it be similar -- I guess we've got more charges coming next year, so it's going to be spread out as well?

Yes. It will be spread. It won't be spread in the exact same ratio, but the cost, again, applies to the business units affected.

Now, will those charges be more concentrated in the first part of the year -- for '06, or will they be [inaudible]?

Actually, no, because the nature of the charges that we expect to incur in '06 go above and beyond the termination benefits. They're expenses that are related to the re-alignment of the business under the new organizational structure, and you'll see those expenses going on throughout the year.

Okay.

And then on the tax expense in the quarter -- was any of that affected by the settlement that you guys discussed in your last queue?

No, it wasn't. We're still waiting for that to happen.

That was a result of our ability to utilize some additional foreign tax credits that effectively reduced our estimated rate for the year. As you know, the accounting rules require you to roll the adjustment for that through the current quarter.

And then, forgive me if you said -- what the -- did you say what the effective rate would be for '06?

Our assumption right now, Shane, for '06, is a 35% rate.

Okay.

And then -- anything else, looking in particular at the maintenance and the services, gross profit margin kind of took a dip. Was that -- was there anything in there beyond restructuring charges that might have impacted that number?

In maintenance and service -- most of the expenses related to S2 ended up in those two categories, so that affects our margin. I do want to correct a number that I expressed early on when I was talking about operating expenses. I believe I said that we incurred a 3.1 million of expenses related to S2 during the quarter. I should have said 3.8 million.

Okay.

And then -- the G&A levels, now that you're post-SarbOx, and I would think the corporate strategy expenses are falling off -- do you expect to see much change in that number? Will it be steady? What -- what are you looking for going forward?

We may see some change, but the caution I would give everybody is not to just assume that expenses related to Sarbanes-Oxley 404 compliance just disappear. If you stayed up with any of their recent literature, it's telling corporations actually not to expense -- expect much of a decrease at all -- at all. We should see some, but it's very difficult to predict at this point in time.

But it is fair to say that, in the fourth quarter, we had a confluence of -- a lot of -- what's the term we want to use?

Special.

I'm using an accounting term. Special expenses flowing through the quarter. We tried to delineate the larger items as they related to that.

Okay.

And then one final question -- did you say earlier, Dave, about the revenue contribution from S2?

No, I did not.

Do you have that number?

That revenue contribution was approximately 2.5 million.

Okay.

Thanks a lot.

Your next question is from the line of Franco Turrinelli with William Blair & Company.

Good afternoon, gentlemen.

Good afternoon.

Actually, a couple of related questions. I guess I'm trying to understand this 3.8 million in S2-related expense. If we should think about it essentially, a one-time item, or if that is really kind of a new level of expenses that we should presume as a result of the acquisition of S2?

I wouldn't really think of it either -- in either of those ways. I would view it as a combination of one-time and ongoing. So, it's a number that -- we're not going to tell you where it is. We're working through the quarters, but it's a number you should see declining through the quarters.

Okay.

And then -- turning to the '06 numbers for a second -- 2.5 million from S2 in the quarter, is it possible to identify the S2 contribution in your '06 thinking?

We've given earlier guidance to the contribution and revenue that we expect from S2, and that's 17 to 20 million. We're not changing that guidance at this point.

Okay. That's what I was driving at. So we're still thinking --

I would not use the fourth quarter as indicative of future quarters on either the revenue or expense side of S2.

Okay.

We're still on model. My comments, I alluded to that, but we're still on model with S2.

Okay. Great.

Likely prior question -- I guess I'm still trying to think through how I should allocate those 1.2 million charges from the reorganization simply to get a better sense of the run rate of expenses across different categories, but what I think you're telling us is that it's pretty hard to parse it out into different components in an income statement?

Yes. We really not [inaudible] breaks down.

But you still want us to exclude it from the numbers? Okay.

All right. Thanks guys.

[OPERATOR INSTRUCTIONS]

We now go to the line of Chris Christodolou with Inwood Capital.

Good afternoon, gentlemen.

I know we will have more cash flow data in the 10-K when that comes out, but -- I'm not sure if I'm looking at this right, but -- you generated 50 or some million in free cashflow during the year?

That's approximately right.

Okay.

And, the software, as a service division -- you made reference to some of the partnering you will do with some larger corporate client.. Do you anticipate it requiring any material CapEx on your part?

We have not envisioned that in our 2006 plans.

Okay.

The number in our press release was 53.2.

53.2 of operating cashflow.

Okay. Right. Okay.

Well, so I guess in the last year, you bought 30 million back in stock, you paid 37-something million for S2, and you barely made a dent in your cash pile. So it's a nice problem to have, and good luck with '06.

Thank you.

And next, we go back to the line of Shane Diamant with Stevens, Incorporated.

Just a couple of follow-up questions.

Phil, can you talk about a few more details on the initial success with S2 as far as what your sales force has seen, and whether or not you've gained much traction with maybe cross-selling to -- I think what was characterized before is many of the inactive customers that S2 had?

We have had success in terms of being the inactive customers. I think the biggest success we've had actually has been in our tools business, which we didn't -- we really didn't expect it to come out of the -- out of the tools. I think we got a couple -- we got a couple new pieces of business there.

We are actively re-contacting the inactive customers, both ourselves and through cooperative efforts with vendors. We have not booked a measurable amount of business at this point, but it's an on the part optimistic -- it's a good environment -- I guess-- is the best I could say in terms of that.

Okay.

And just a follow-up to Michael's question on the free cash flow. Has your priorities for the deployment of cash changed at all? Is it still the same pecking order of acquisitions, product investment, and then, chair repose?

Yes. I think that's true.

The only thing I would say about product is that product has to perform better than share repurchases, to be in front of share purchases.

We'd like to think that the worst investment we make is buying back our stock, and that when we get opportunities that are better than that, we're willing to put the money out, whether that's product development or whether that's acquisitional.

Okay.

And then, one follow-up question for David. Do you have the D&A expense in the quarter?

I can get it for you. I don't have it right at my fingertips.

Okay.

It's about 1.6 million.

Okay.

Thanks a lot.

Your next question comes from the line of Eugene Fox with Cardinal Capital Management.

Hello, gentlemen.

Just a couple of questions.

With respect to the investment spending, I think, Phil, you had talked about a 3 to 4 million. What line items should we see that in in the income statement?

It's 4 to 5 million is the investments pending, and it's going to -- I can tell you that it's largely around smart card manager and in our risk product. I don't think -- maybe Dave can give you a better sense of the line items than I can.

Yes.

You'll see it primarily in research and development, and cost of maintenance and services.

Okay. Do you expect this to be a one-year phenomena, Phil, or will we going to see it beyond '06?

Well, this is the first year of about a three-year investment in these products, but the pay back is pretty good.

You heard us say we're hovering just a little bit below 100 fraud installations around the world, which actually represents 25, 30% more licenses than that, if you were going to look at it from a license standpoint. And that business -- that business is growing nicely, and we have to invest. We have to invest in it. We're getting margin back, but it's not like we're investing in '06, and we're going to get paid back in '09. We're going to invest in '06 and get paid back the second half of '06 and '07, this is where we're going to start seeing the payback.

And I think we will -- if we get the results we're looking for, we're going to keep investing behind -- behind that, although I don't think it's going to show up very neglibly from a margin -- from a margin standpoint. I think that one will pay itself back.

Smart Card Manager, we're going two ways on that. EMZ is providing a large opportunity to us, but we've also gotten ourselves in the business of national identity cards, and that's a very worthwhile piece of business. So we're conditioning to pursue that.

Just a couple of others.

Any sense of what your CapEx budget is for next year?

It should be between 4.5 and 5 million.

And, last question.

As it relates to share repurchase, I know you spent relatively little in the fourth quarter. I presume that was more related to timing. Is your expectation that you would finish the current authorization within calendar -- fiscal '06?

I don't think we've really -- I really don't think we've calibrated it. I mean, we still have the authority -- we still have the authority out there, and we'll still be operating as the market allows us to.

I guess, let me rephrase it. Is there any one factor that will determine the pace of that program?

No.

Thanks.

[OPERATOR INSTRUCTIONS]

Gentlemen, at this time there are no further questions.

Are there any closing remarks?

Yes, I just want to thank everyone for spending time with us on the call today.

We appreciate your continued interest in TSA, and we're excited about the platform we've created with the business and look forward to a solid 2006.

Thank you, gentlemen, and ladies and gentlemen that joined the call today, We appreciate your joining us.