Cohu Inc (COHU) 2002 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Corillian Corporation Third Quarter 2002 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, President and Chief Executive Officer, Alex Hart. Please go ahead, sir.

Thank you. Good afternoon, everyone, and thank you for joining us today. Welcome to Corillian's Third Quarter 2002 Financial Results Conference Call. I'll be talking about our Company's business outlook, and Steve Sipowicz, our CFO, will discuss our financial results in detail. We will conclude, of course, with Q&A.

All of you should have received a copy of our third quarter financial results press release. If not, you can access a copy of the release on the Investor Relations section of our corporate website.

I would also like to remind everyone that the intention of this call is to comply with Reg. FD and to address topics and issues with all our shareholders that might affect Corillian's business in the future. To do this, we must make forward-looking statements. Please remember that our actual results may differ from these forward-looking statements. For a description of risks and uncertainties that may affect Corillian's business, please see our annual filing on Form 10-K and our quarterly filings on Form 10-Q and other SEC filings. Any forward-looking statements are based on expectations as of today. The Company disclaims any obligation to release any updates to any comments made in this call or to reflect any changes in business conditions.

Now that the necessary disclosures are out of the way, let's talk about the third quarter.

We had a good quarter, hitting the positive end of the range of analysts' expectations for both revenue and adjusted EBITDA. Revenue increased to $10 million, and our adjusted EBITDA loss was $982,000, or $0.03 per share. As promised last quarter, we remain on track to reach adjusted EBITDA positive by the end of this year.

Our ongoing operating expenses this quarter were $7.4 million. We expect to maintain or slightly reduce this expense base until revenue opportunities support a greater level of investment. As we've discussed previously, this is a difficult environment in which large deals are tough to come by. Large banks using first-generation in-house systems are reluctant to write off the unamortized expenses associated with building these systems. That being said, there are big bank opportunities out there, and we are pursuing them aggressively.

Some of the most exciting opportunities in the big bank space are within our existing customer base. Corillian is the established leader in this space because our products work, our people execute, and our platform is both highly scalable and very flexible. Our existing clients, especially our largest clients, have sustained us during the past 18 months, and they continue to ask us to build and support the next level of eFinance innovation. We've used our co-development approach to product creation to build significant new functionality for them that both serves their strategic needs and provides us with the next set of applications to sell more broadly. Our customers recognize that this new functionality gives them immediate opportunities for revenue generation, cost reduction, and improved customer service. We see numerous opportunities to build both additional functionality for them and to integrate the technology of others in a way that allows them to more cost effectively serve both new channels and new lines of business by leveraging their investments in the Corillian Voyager platform.

The midsize financial institution market is slightly different. Far fewer of these institutions have chosen to build their own eFinance platforms, so there are more opportunities in this market to replace a competing platform. However, in this environment, these banks are reluctant to replace under-performing outsourced systems unless there's a catalyst, such as an expiring contract or a serious performance issue with their existing platform. We signed a deal with one more top-50 bank this quarter, and there are a number of additional replacement opportunities on the horizon. In addition, many of our existing clients in this market have the same interest in leveraging their Corillian Voyager investments across multiple business lines and multiple customer touch points, and we will use both internally developed products and complementary products from partners to capitalize on these revenue opportunities.

We continue to find success with the upper tier of the community bank and credit union markets. Our world-class functionality, flexibility and unique ability to provide both hosted and on-premise solutions to the leaders in this market segment continue to pay dividends, as evidenced by the signing of John Deere Community Credit Union and Ventura County Credit Union this quarter. As we've discussed before, however, we are not trying to sell to every financial institution in this segment on a direct basis. We will continue to target the upper echelon of this market, but we'll also begin a concerted effort to find distribution partners that are able to reach a greater number of community banks and credit unions in a cost-effective way.

As you know, we announced two weeks ago that Ted Spooner, our founder, will be taking a less active role with the Company. Ted founded the Company in 1997 and has built it into the market leader in this space. He will continue to both support and serve Corillian as Chairman of the Executive Committee of the Board of Directors and as Chief Corporate Strategist. Ted has made a huge contribution to this company, in particular, and to the industry, in general, and will now take a well-earned opportunity to achieve a more balanced life. Ted, our management team and our board feel that this is a good time for this transition of leadership because we are well positioned financially and competitively, and we've established a solid industry reputation and leadership position.

We have continued to manage our expenses without compromising the quality of our projects and customer support. We continue to enjoy high referenceability rates and a reputation for executional excellence. Our cash burn for the quarter was approximately $200,000, leaving us with a cash balance of $14.1 million at the end of the third quarter. We remain confident that we have sufficient cash to meet our goals in 2003.

Steve will now review the financial results for the quarter in more detail, I'll follow with a discussion of our business outlook, and we'll close with Q&A. Steve?

Thanks, Alex. Good afternoon, everyone. Now, let's start with a review of the income statement.

Revenues for the third quarter were up to $10 million, compared to second quarter 2002 revenues of $9 million. Third quarter license revenue was 2.3 million, or 23 percent of total revenue, compared to 2.8 million, or 31 percent of total revenue in the second quarter of 2002.

During the quarter, we added three new customers. Two have been announced – Ventura County Credit Union and John Deere Community Credit Union. We expect to be able to soon announce the name of the third customer, a top-50 U.S. bank. We now have 22 of the top 100 U.S. banks as customers, and our customer count is now 64. Of the 64 total Corillian customers, 50 have been implemented at the end of the quarter. Backlog at September 30, 2002 was $38 million, compared to $41 million at June 30, 2002.

Based on end-users, Corillian Voyager remains the number-one Internet banking platform. As of the end of the third quarter, there were 8.2 million end-users on Corillian Voyager platforms, compared to approximately 7.2 million at the end of the second quarter of 2002 and 3 million end-users as of September 30, 2001.

Potential DDA end-users for live Voyager implementations at September 30, 2002 are estimated to be approximately 40 million, resulting in approximately a 13-percent DDA penetration of existing live customers. Potential DDA end-users for all Corillian Voyager customers are estimated to be approximately 50 million. Total potential end-users, including credit card customers, are approximately 100 million.

Continuing down the income statement, gross margins were 50 percent during the quarter, compared to 43 percent in the second quarter. The increase in gross margins was due primarily to improved utilization and efficiency of our professional services staff, coupled with improved margins on maintenance and hosting.

Excluding a litigation settlement charge and amortization-deferred stock-based compensation, operating expenses for the third quarter were $7.4 million, a reduction from the 8.7 million recorded in the second quarter of this year.

In October 2002, we settled a previously disclosed lawsuit brought against us by a bank that was not a customer of ours. The underlying facts and allegations were just as we have described in our SEC filings over the past two years. The plaintiff alleged that one of our employees used the plaintiff's proprietary technology in performing services for us and that we participated in this use. While we strongly disputed the allegations, we were faced with a jury trial on complicated technical and legal issues. Our case depended largely on the ability of the jury to understand our business and our technology and the complicated facts and expert testimony that would've been involved in the trial. In the end, we assessed the exposure we faced in the jury trial, as well as the continued legal expenses through the trial and potential appeals, and concluded that the best course of action was to secure a certain outcome through settlement.

As part of the settlement, the plaintiff will receive 500,000 shares of our common stock within the next 30 days and 1.8 million in cash, of which 1.4 million will be paid in November 2002, and the remainder over a two-year period. While we were extremely – while we are extremely unhappy at the expense of this lawsuit and settlement, we were very pleased to put this matter behind us and eliminate the uncertainty the lawsuit presented. The lawsuit and the settlement will have no effect on our ongoing business or customers.

We accrued $2.6 million related to this legal settlement in the third quarter. In computing adjusted EBITDA and pro forma results, we have excluded this charge because it represents a significant, unusual event. We are not a party to any of the litigation and do not anticipate taking any similar charges in the near future.

Depreciation expense included in operating – in total operating expenses was 1.5 million in the quarter, compared to approximately 1.3 million in the second quarter of this year.

Pro forma net loss per share was $0.08 in the third quarter, compared to a pro forma loss of $0.15 per share for the second quarter of 2002.

Adjusted EBITDA loss for the third quarter was $0.03, compared to $0.10 for the second quarter of 2002.

Total number of shares outstanding at the end of the third quarter was 35.6 million shares.

And our headcount at September 30 was 244, compared with 260 at June 30, 2002.

Now, let's turn our attention to the balance sheet.

Cash and investments as of the end of the quarter were 14.1 million, compared to 14.3 million at the end of the second quarter. During the third quarter, we generated approximately 300,000 in cash from operations and collected approximately 200,000 from employee option exercises and stock purchases, which was offset by approximately 700,000 in debt payments, for a total cash burn of 200,000 in the quarter.

As of September 30, 2002, accounts receivable were 4.2 million and unbilled receivables were 2.5 million, compared with 9 million and 4.3 million, respectively, at the end of the second quarter of 2002.

Deferred revenue balances as of September 30, 2002 were $8.9 million, compared to 11.1 million at the end of the second quarter.

Finally, let's turn our attention to the financial outlook.

Based on our current backlog of projects and implementation in sales pipeline, we anticipate that fourth quarter 2002 revenue will be flat as compared to third quarter 2002 revenue. We continue to expect to be adjusted EBITDA positive in the fourth quarter of 2002.

With that, I'll turn it back over to Alex.

Thanks, Steve.

In summary, we had a solid quarter, being the high end of the range on revenue and earnings. We anticipate our first positive adjusted EBITDA quarter next quarter. We're excited about where the Company is headed, and we feel like we've done a good job of managing the Company through a very difficult time. We think that the worst is behind us, and we are confident that we have the products, people, customer relationships and infrastructure required to sustain our market-leading position through 2003.

We have significantly reduced our headcount over the past four quarters without compromising the quality of our products, our ability to execute on projects, or our customer support, and we have preserved our cash through careful management. We believe that we offer an exceptional value proposition and that we will continue to win significant new deals in our target markets.

At the same time, we will continue to add value to the investments of our existing customers [indiscernible] they've made Corillian Voyager and create both new functionality for them and, at any rate, complementary technology for them.

The silver lining in the current economic slump for Corillian is the degree to which our large customers are seeking to leverage Corillian Voyager within those enterprises. Many of the silos that have traditionally existed within large financial institutions are being dismantled, and this dismantling is creating numerous opportunities for Corillian to extend its reach within the enterprise architecture of our clients. We have long viewed online banking and bill payment as the entry point rather than the end game, and we are poised to capitalize on the pervasive position of the Corillian Voyager platform within financial institutions.

Our industry-leading innovation with the largest banks in the country provides us with significant leverage in the regional bank, community bank and credit union markets, as well, and we will continue to explore opportunities to expand our distribution capabilities. Our existing and prospective customers have generally reported improvements in their financial results over the past few months, so we're hopeful that the constrained technology budgets that we have seen over the past two years will begin to grow. If that happens, we believe there will be significant up side for Corillian in 2003.

Thank you for your time this afternoon. We appreciate your efforts to understand our business and the opportunity to share our story with you, and we'd be happy to take any questions you may have at this time.

Operator?

Thank you. If you do have a – if you do have a question at this time, please press the one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Once again, if you do have a question at this time, please press the one key now. One moment, please, for the first question.

Our first question is from John Kraft of DE (sic) Davidson. Please go ahead.

Hi, guys.

Hi, John.

Congratulations, Alex –

Thank you.

-- promotion.

Thank you.

A couple of questions here. Your new user – or end-user growth was pretty strong for the quarter. How much of that was due to the three new customers? I suppose I could figure out with the two that you've announced but the one top-50 bank – or, I guess, you know, in total for those three customers?

Well, as you know, John, it takes us a while to implement the customer, and we don't – the numbers that we show are live end-user numbers, so there are zero numbers coming out from the three customers that we signed last quarter because we haven't implemented those customers yet.

I guess what I’m trying to do is get more of a -- sort of a –

Sure.

-- organic growth out of that, and can you estimate how many – how much of that was organic?

Yeah, all pretty much the whole of the million was organic, of which about 400,000 to 500,000 were credit card users.

Okay, credit cards. And it sounds like you can't give us the name of this new top-50 bank. Can you tell us which vendor you replaced?

That would've been Edify S1.

Okay. And you also mentioned on the call that you expect the expenses in Q4 should maintain at levels seen in Q3. With the recent layoffs that you had, when do you expect to see some of the reductions due to that? Or what's, I guess, going on there?

As you know, we – a significant number of employees were reduced as of June 30 in the second quarter. So we got some improvement in expenses as a result of less employees in the third quarter. Fourth quarter expenses should be in line with third quarter expenses, except obviously for the fact that we should not be incurring any legal expenses of any size in the fourth quarter, so we should get some reduction as a result of that. But the majority of the cost savings from the layoffs occurred as of June 30 and so were reflected in the third quarter results.

Okay. And trying to break out the success you've recently had with the Voyager SE, could you try to estimate how much of your revenue on an ongoing basis is this recurring hosted Voyager SE revenue? I mean you said that 2.3 million was license, but trying to break down the rest of it.

Yeah. SE revenue is still a relatively small percentage of our total revenue on a – on a current basis. We're still building the customer base there, and what we recognize, obviously, in the quarter is associated with the recurring fees or the monthly fees that are coming from those customers, and that's still a relatively small percentage of the total services revenue.

Any type of guess? I mean a fair guess for what that would be?

Yeah, it's about 10 percent.

Ten percent, okay.

John, this is Alex Hart. I need to correct an answer I gave you earlier. I thought that the company replaced was Edify S1, and actually it was FundsXpress. I was thinking of a different deal.

Okay. Good enough.

Thanks, John.

Thanks.

And if there are any additional questions at this time, please press one now. Our next question is from [Aaron Kessler] of JP Morgan. Please go ahead.

Hi, guy.

Hi, Aaron.

Can you give a little more detail on what happened to the accounts receivable and property plant and equipment balances?

Sure. Accounts receivable, we've done a good job, I think, at collecting receivables, particularly over the last six to nine months, and so a lot of their reduction is a result of collecting receivables. And on the fixed asset side, our depreciation levels are about 1.4 to 1.5 million per quarter, so that reduces fixed assets. We've had virtually zero additions over the last couple of quarters.

Okay.

And we've also accelerated a small amount of depreciation on some international assets that we had.

Okay. And do you have the revenue split in the quarter for license maintenance services?

Yeah, what we do is typically split between licenses and services.

Okay.

The license revenue during the quarter was – excuse me. Just hang on one second. Just want to – was 2.3 million, or 23 percent of our total revenue for the third quarter.

Okay.

And that was 2.8 million, or 31 percent of total revenue in the second quarter. What you can see is that most of the margin gain in the quarter has been as a result of improved margins on services.

Right.

Professional services has a better utilization. And in maintenance and hosting, just because we got higher levels of revenue in those areas compared to the relatively fixed-cost base that we have associated with those revenue streams.

Okay. And so the environment for additional [C] purchases by your additional customers, can you give a little – details on that?

Yeah, they – obviously, customers are continuing to buy additional [C] purchases as they, you know, reach the level of their new blocks.

Um-hmm.

You know, the advantage to us is that as the end-users grow, we're able to bill additional amounts for these end-user license blocks.

Okay. And – quick question about your active customers. Have you traditionally included their credit card number in that licensed users?

Yeah, we've always included the credit card numbers in total. What we do is for purposes of giving information about penetration rates –

Right.

-- we've excluded credit card numbers because that kind of artificially lowers the penetration rate.

Right.

Take out the credit card numbers, which are close to 2.9 million in the total 8.1 million.

Okay.

That represents bank users.

Okay, great. Thanks, guys.

Thank you.

Our next question is from [Barry McCarver] of [Stephens, Incorporated]. Please go ahead.

Good afternoon. Could you guys talk just a little bit about the two outsourcing contracts you got during the quarter? I believe they were both takeaways from Digital Insight? Can you go over the factors that stimulated those two credit unions, I believe they were, to come over to Corillian?

Sure. We continue to find a lot of success with what we call the upper echelon of the credit union and community bank markets. The reality is that Digital Insight is an excellent processing company. They provide a great service for a large number of small institutions. For those that want the same level of functionality that runs at Bank One and Chase and Wachovia and SunTrust, etcetera, if they really want to compete with the giants in their geographies and they want the flexibility of being able to both start out on a hosted basis and perhaps take it in-house to pursue what we call the "path to control," we really are the clear choice there. And so it really is an apples/oranges comparison. Digital Insight is obviously a great company. They've done very well in their segments, but there are people at the top of their customer market that find what we offer to be a much more compelling value proposition.

I think you may have said it before, and I missed it, but can you tell me how many outsourcing customers you have altogether?

I think it's 10.

I think we're at 10 today.

Okay, thanks.

Thank you.

Our next question is from Richard Zandi of Deutsche Bank. Please go ahead.

Hello?

Hi, Richard.

Hi, this is actually [Chuck Zitco] for Richard Zandi.

Hi, Chuck.

Could you guys tell me the reason why a backlog and deferred declined in the quarter?

Yeah, in terms of backlog, we booked less revenue than we actually recognized in the quarter, so there was a decline in backlog by about $3 million net.

In terms of deferred revenue, typically what we do is when we get an up-front payment from a customer on a deal, we'll put that into deferred revenue and then recognize that as the work is performed and the revenue is released. And so in terms of the timing of this quarter, we recognized more revenue out of deferred revenue than we booked into deferred revenue.

Okay, thanks.

Thank you.

Our next question is from Chris Penny of Friedman Billings. Please go ahead.

Yeah, hi. This is actually [Matt McCormick] for Chris Penny. I just had a question. You were saying that the banks have been deferring their IT spending. I just wanted to know if you're seeing a difference in between the size of the banks – small, medium or large banks – if it's just being deferred across the border or if there's a strength in either one of those pockets?

There hasn't – there hasn't really been a big change from segment to segment. The biggest factors tend to be the amount of pain a given institution is in because of its current platform. So those that are having scalability issues – most typically, they are the larger banks – those that are hitting financial ceilings, if you will, because they've been paying by the drink and have so many online users now that it's no longer an economic model that makes sense for them, are feeling some of the most pain. So scalability, availability, and in some cases, just a lack of flexibility on their current platforms that makes them want to move to the next generation is causing them to make those decisions now.

Okay. And then, obviously, you didn't give guidance for next year, but should we just assume just essentially flattish revenue throughout the year unless there is a turnaround in spending? And then, you know, do you have a best-case scenario that you could give us 10, 15 percent up for the year, something like that?

Not at this time. We're in the process, obviously, of looking at next year in a lot of detail, and we'll put out guidance on next year when we do our year-end call.

Okay, great. Thank you.

Thank you, Matt.

There are no further questions at this time. Please continue.

Well, if we have no further questions, we'll close now, and thank you for your time this afternoon. Look forward to talking to you about the fourth quarter and the year-end.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may disconnect at this time. Have a good day.