Fidelity National Information Services Inc (FIS) 2002 Q2 法說會逐字稿

Good morning and welcome to the Intercept Q2 earnings conference call for August 5th, 2002. Host is Carol Collins. Ms. Collins, please go ahead.

Good morning and welcome. The purpose of this call is to review the company's financial and operating results for the second quarter of 2002. During a portion of this call we'll attempt to update you on our expectations for the remainder of 2002 and will make several forward-looking statements. Anything we say concerning Intercept's projections, expectations and beliefs for our future operations, growth, prospects, strategies, business or financial condition is a forward-looking statement. Actual results may differ materially from those expressed or implied by those forward-looking statements due to many factors, including whether we can continue to sustain our current internal growth rate or our total growth rate, whether we can successfully close and integrate recent or future acquisitions of assets and businesses and other operations, the continued and future acceptance of and demand for our products and services by our customers and other factors discussed under management's discussion and analysis of financial condition and development of operations disclosure regarding forward-looking statements and our Form 10-K and other SEC filings. Now that we have that out of the way I'll turn the call over to John Collins.

Thank you, Carol. This morning with me is Lynn Boggs and Scott Meyerhoff, the president and CFO. As is our practice, I'll keep my comments brief, although I do have a couple. Certainly we're happy to report and proud to continue to have another good quarter. And I do have a couple of comments and I think that I want to couch them with: I feel good about the company. I say that a lot, but in this environment, this corporate environment, this market environment, we all have to be guarded with - we have to guard our comments, the disclosure that Carol just read I guess has just become second nature with everybody and everybody kind of just blows off that disclosure and they forget we really can't predict the future. And that disclosure actually should be - we should pay attention to it, I guess. I still feel good about the company, even though I'll say with, add to that comment that obviously I can't predict the future for this company nor can anybody predict it for the market. But I feel good about where we are and continue to feel good about the company as far as our performance. This particular quarter, we've had some really exceptional performance on the merchant processing side, the banking side was a little weaker than we had expected or we would like. But one comment on the banking side and Lynn will make some comments about the quarter, but I'll do this quickly, but one comment about the banking side is we don't see that we're actually losing banks. The sales cycle may be getting a longer, banks are a little slower to make decisions, but we have probably the best and the largest pipeline of sales prospects as we've ever had in the history of the company. So we continue to have a lot of prospects and we continue to be optimistic about the sales in our business. But, again, we are a little reserved on the wait and see and let's see if the trend continues on slower decisions. But we certainly have a lot of banks out there that in our view and the way we're seeing it is we're not losing them, they're not going elsewhere they're just taking a little longer to make a decision than they have in the past. One comment about the merchant process versus the banks. I've sediments that part of the reason that we like the diversification of multiple products is it gives us an opportunity to make up for short falls in a particular product that may not be moving well with other products. So we don't necessarily see that as a bad thing to have those other products. I'm going to ask Lynn to make a couple of comments about the events of the quarter, and then Scott will get into the financials and then we'll move on to the questions as quickly as possible. Lynn.

Good morning. I think as John alluded to, we had a very busy second quarter, and I want to hit on some highlights we had going on here at Intercept. During the second quarter we closed out the I-Bill transaction and acquisition. During April we closed the EPX transaction during May. And as noted in the press release, the ATS transaction was closed out at the end of June. So from an acquisition standpoint we were extremely busy. We also consolidated two Dallas centers in our [inaudible] Processing business into one center which is now the company's largest center of our 27 centers across the United States. Since the end of the first quarter we purchased a CRM software company that Intercept expects to follow up on in the next 90 days and roll out a product that we hope will be useful to our bank customers. During the quarter we also signed six new banks to our core processing system which we thought was an extremely good quarter. Excuse me, backing up, during July, since the close of the quarter, we've closed six banks that we think that we continue to roll, the core processing business continues to pick up from that standpoint. Merchant processing, we've closed several large new merchant accounts including Sony Music, Weather Channel, Apple Vacation, Terrel [ph] Lycos, as well as many others. As you can tell there, are many things going on at Intercept and we've had a pretty big quarter and July since then we think has been a very good July. But as John alluded to we have seen some slow down in the banking business. Now I'd like to turn the call over to Scott.

A couple of administrative matters before we get into the particulars of quarter. The press release distributed this morning contains some additional information. Since we completed the acquisitions of the merchant processing division, I-Bill and EPX specifically, we've gone and created two segments, one for the bank processing group, which we call Financial Institutions Processing and one for the merchant group. Just a reminder of what's included in each. Bank grouping included such products and services as core processing, check imaging, check and ATM and debit processing as well as accepting the data communications while the merchant groups includes processing through merchants through any channel, whether direct or indirect. The merchant group includes also the Intercept portion which was previously in the service fee revenue caption. You can see on the revenues we've adopted, emerging task force 1-14, which requires that pass-through calls previously net out the expense caption be reclassified into the revenue caption. We've added a line item on the P and L, you can see the revenue section there's no impact on operating profit as earnings per share [inaudible] Strictly pass-through in nature. Lastly, administratively, we have reported no losses from our 28 percent ownership in Netzee during the second quarter. During the first quarter we had written down our equity to zero. We'll begin to take our percentage of their losses against our note receivable after the preferred shareholders balance has been written as zero which we would expect to occur during the third quarter. With those matters out of the way, I'm happy to report the results for the three months ended June 30, revenues grew to 55.1 million from 32.7 million which is a growth of 68 percent. Revenues from financial institutions group grew to 38.2 million from 29.9 million, or a growth of 28 percent, while the merchant processing group grew to 14.4 million from about 500,000 or so. This group grows largely attributable to the acquisitions of I-Bill, EPX that closed during the quarter. Net income available to common shareholders increased to 5.1 million or 27 cents per share in the second quarter of 2002 from 3.2 million or 22 cents during the first quarter of 2002. Due to the implementation of the FASB Statement 142, as you all know we see amortized and good will amortization during the first quarter of 2002 and the impact from cutting off that goodwill acquisition ends up being three cents. In regard to revenues, the increase was fueled by internal growth of 13.6 percent in the financial institutions group and 22.2 percent in the merchants processing group that resulted in a total growth rate of 14.0 percent. Once again, bank group 13.6 percent. The financial institutions group came across, growth came across most product offerings, but specifically from growth in ATM debit and communication services. As John noted, financial institutions group wasn't quite as strong as we might have wished due to the length anyone of the sales cycle, specifically on in-house software type items. In-house core processing, in-house check imaging and other ancillaries. The merchant processing group performed above our expectations, considering the slower summer months, and given that that business performs better in the latter half of the year due to certain seasonality, we continue to be excited about that opportunity. In regard to recurring revenues, there are approximately 90 percent for the quarter, which gives us a good bit of visibility, which means that there's 10 percent of the business that comes through one0time type items. Gross margins totaled about 55.8 percent for the second quarter of 2002, as compared to on an apples-to-apples basis 55.7 percent for the first quarter of 2002. As we talked about there is an amount moved out of the revenue caption related to merchant processing. That was net recorded net. So there really weren't any cost of sales associated with it and extremely high gross margins. For the second quarter of 2002, SG and A as a percentage of sales were approximately 35 percent, which was consistent with where we were last year. In regard to the tax rate, it was approximately 37 percent, which was in line with expectations. The EBITDA for the quarter was 11.4 million after excluding that $400,000 charge related to the consolidation of the centers, as compared to 7.9 million for the three months ended June 30, 2001. So with that strong operating results, we continue to feel good about our numbers but guarded given the current environment that we live in. With that being said I'll turn it back to John.

I don't have any further comments at this time. Sylvia, we'll open it up for questions 00:11:24

We will now begin the question and answer session. To place yourself into the question queue, please press star 1 on your touchtone telephone. If you are using a speaker phone, please pick up your handset and press star 1 at that time. If your question has been answered and you wish to withdraw your question, you may do so by pressing star 2. Please go ahead if you have any questions. Your first question comes from Jeff Baker. Please go ahead.

Hi, guys. A couple of questions. Scott, can you tell us how much revenue was from the legacy Intercept merchant business that's now booked under merchant services, and I think that's reported net, correctly?

Yes, sir, if you turn to the segment reporting piece, you can't see it in the second quarter but it works out to be about $550,000 or so in the second quarter of 2002. That was taken out of the Intercept service fee caption and moved into the merchant group.

Do you have any transaction metrics that you can give us on the merchant business for the first quarter of 2002 and the second quarter of 2002?

No, I don't. There's no pertinent information I have to get into. We talked a little bit about their volumes, the combined basis being approximately six billion dollars on an annualized run rate. That hasn't changed significantly. It's still running in that same area. But as you can see, given where we came out and the revenues and results of operation there, that did perform above our expectations.

And can you give us the percentage of merchant service revenues that came from financial institutions and where do you see that trend going forward?

The amount from the merchant processing that came through banks was roughly that 550,000 amount that came over. EPX has a small piece that came through the bank channel, but rather insignificant. So the somewhere in the neighborhood of three to five percent would expect that to continue to be in the same neighborhood for the short-term, because the other side of the business is growing just as fast so I wouldn't expect that to trend differently.

I guess the question I'm trying to get to, are you guys seeing any cross sales now that you have the merchant business, the full service offering, are you seeing any cross sales into the banking channel?

Jeff, I think that certainly we're seeing opportunities for cross sales. We have a lot of leads, a lot of things going on. I don't think that we've seen anything significant to this point. But we just recently spent time - I started to say integrating. I really I guess more cross training some of the salespeople. We actually have a meeting set up sometime here in the middle of August for a more thorough cross training job, I guess, would be one way to put it. So there's not a tremendous number of leads going back and forth. Most of those that have gone back and forth at this point are just things that we knew about that I'll put it this way is just picking the cherries and things, the low hanging fruit that we know about. Still not a lot of leads being generated. But as Scott pointed out, and I think this is an important thing to remember, if the traditional merchant side grows fast enough we can still run pretty hard and still might not have the banking aside achieve a much higher number in the short-term than the numbers that achieved today as it relates to a percentage, if you're with me.

Yeah, I understand. And then just a follow-up there, I'll let somebody else jump on, where are you having success just in the core business pricing? Is it pricing, technology? What are you able to do?

Hard work. Do you have any comments on that, Lynn?

I think one of the issues is that both companies, both I-Bill and EPX have seen a tremendous response to their product, carrying our balance sheet today. They'd be able to walk out to a company that previously they may not be able to compete against for the business because of the competition, not necessarily pricing but on the fact that they looked at those two companies and said where are you all going, now with Intercept behind them we see a lot less resistance and a lot more response to saying yes we'll do business with them.

Thanks, guys.

Your next question comes from Steven Laws. Please go ahead.

Good morning, guys. First question is I wanted to see what you guys are hearing from your customers, why you decided to add a CRM product and what your expectations are for that product line.

Well, as far as I'll actually ask Lynn to speak to the expectations as far as why we decided to add it as - and I've said since the beginning that we want to add any products that we think our customers need, any that they're going to use in the back room. We don't want to be everything to everybody. But we do want to have most of the back room for a financial institution. And in some recent meetings, we've had some focus group meetings that actually some of them went through one of our bankers, Bank Partners, CRM was one of the most commented on applications that people talked about in those meetings. It was not, I don't think the banks are 100 percent ready for it, especially the size of our average bank, I don't think they are. But they're getting there. And there's a lot of talk about it and everybody is talking about CRMs right now. So I think that was the reason that we needed to start looking. We've actually been looking for some time. I'll let Lynn comment on how it may fit and where it's headed.

I think the big thing, as John said, we continue to have, as larger banks have become more involved in their sales cycle in their banks adding additional units to customers, we see our focus being the mid-tier banks also we need to look at. And as we've spent more time with them, we felt comfortable with the product we were buying that we could develop in a way that would fit those community financial centers and roll out a product to them that they could cross sale their products on a very limited basis at first. We don't think they're ready to move into a full CRM customer call center that some of the larger banks are. But what we saw we think we can get our feet wet and offer products to our customers that will get them started at CRM.

I guess one other housekeeping. The cap ex for the quarter?

2.6 million

Next question comes from Art Bender. Please go ahead.

Can you tell us how the integration of I-Bill and EPX is going and whether we should expect further margin improvement or should margin improvement just be due to scale?

I think from the standpoint of the synergies we've found so far we've been spending a lot of time with the administration side, the HR, finance and legal, things like that. Spent most of our time on the initial front doing that type of work with them, trying to integrate those pieces. As John said, we've got a meeting scheduled in the sales and marketing side. We've got training going on that's very spotted, but we have the whole group coming together in August. We'll have a better feel for it at that time. Until we have that whole group in in one place - we've spent a lot of time going back and forth but we'll have everyone in one meeting, spend some time training, see what the centers there are that we've missed and start it up in the third and fourth quarter.

As part of your question on margin improvement, right now what we've achieved is largely due to scale. We would anticipate some synergistic opportunities. But as we talked about originally we weren't expect to get any of that a 90, 100 day period from the date of close of which EPX was May 24.

I'm having a hard time understanding the guidance you guys are giving. John is saying that the environment is slowing down, the sales cycle are lengthening. Lynn said you had an outstanding July. Can you kind of reconcile those two things with what you see in the environment right now?

I'll do my best. Again, let me reiterate the disclaimer. I think we're talking about a lot of environments here. We're talking about a corporate environment in congress that has presented itself that causes us concerns even having these conference calls. I mean honestly all these things concern me because we never know how people are going to take what we say. So I'm going to be a little conservative and I'm going to make every effort to make sure that everybody understands we don't know what the future holds. But I'm going to try to tie that to Lynn's comments. We normally don't even give, as you're aware we don't give the number of institutions we sale. I think Lynn's comments about July really give an indication the fact that we did have a good July. And even though things have slowed and a lot of the decisions have been held up, some of those were held up and probably caused us to not have as strong a second quarter as we would have liked. But a lot of them came through in the July time frame. So I think it was just one indication that July was a good month and we think that there is still a good future here. My comments are more for almost disclaimer purposes. I mean the fact that we don't know what the future is. It was slow. We want to say it was slow. We want to admit that the one time sales weren't what we expected them to be. So we don't know what August is going to be like and September is going to be like. But we did give an indication of where we were in July. So they may sound contradictory. I don't think they are. It's just we want to be careful how we say it, that's all. July has been an excellent month. We hope we can continue that in the future. But we just want to make sure that everybody knows that we don't know that.

Given where we're at, we're not changing guidance we're just really indicating that based on where we are, we're probably more concerned than we ordinarily would be because with 90 percent recurring revenue we do have a whole lot of visibility. We feel good about what we're doing, but as John pointed out and with one time sales slowing down the good part for us is it makes up such a small percentage of what we do that it takes a whole lot more in that particular category to miss to make us miss.

Thanks very much.

Next question comes from Nick Fiskin. Please go ahead.

A couple of questions. There were two balance sheet items that were up. And I'm wondering what's behind that the specific ones were other assets and inventory prepaid expenses and other. Could you clarify why those were up? That would be great.

Start with other assets, we put all the restricted cash that we have on the balance sheet into the other assets category, because it's not a current item, not within one year. So the increase there is primarily due to amounts that we have on reserve with different of our partners that are restricted cash in nature, primarily due to the merchant processing business. In the inventory, prepaid expenses and others, the increase there is primarily due to certain post closing items from the transactions that are amounts due back to us based on escrow arrangements and closing balance sheet amounts.

Okay. Can you give us an update on your new debt facility?

Yes, first off, you make it sound like we have one. We have a 50 million dollar line plus a 10 million dollar extension. We're working with our banking partner right now on a syndicated facility, which we would hope to have closed by the end of the third quarter. There's no terms public on that. There's term sheets back and forth, but given where we are right now we feel good that that will occur and we will have it.

How much did HSI add to the revenue?

I believe it was just shy of four million dollars.

So how much did you include from HSI in that internal growth? Was there a quarter over quarter or year over year increase that you included?

This is probably a perfect time to go ahead and address a question I got asked just last week. One of the investors called me and asked me if we went ahead and moved business from our Dallas center, say, and moved the print business to Intercept output solutions, what would happen to that revenue? Meaning the whole idea behind us moving that would be that we can do it more efficiently and better cost savings but for some reason some people got the idea it would be an internal growth item which it would not. Those items are not included in internal growth. They never have been. They would come over from a cost synergy perspective. But as you can see all the posted and pass-through costs that are already reflected on our P and L with VIP [ph] F Fund-14 would just really stay in revenue or wouldn't increase or decrease the internal growth rate at all.

So the increase in HSI revenue has been excluded from internal growth?

Any increase related to cross sales or movements within the Intercept customer base is not an internal growth item. That's correct.

Can you give us an update as to how many core customers you have today and give us an idea of how meaningful that six was, like if you could give us how many you added in Q2.

We don't typically disclose that information and occasionally we'll talk about, and presentations we'll talk about total number of relationships and on total number of core customers. And I think that's probably in that 450 range or in that ballpark. Let me give you my view of the significance of the six. If anybody on the call happened to read a short report several months ago, it went into detail of how many banks change data processing in a year. And actually their number was 62. If you went with their calculations, the total universe of banks to change data processing in a year, that you service bureau [ph] Was 62, so you might give some significance from six in July versus 62, the writer of that short report thought 62 would change in the nation. So I guess that means that nobody else in the universe sold any core processing that month. I'm being facetious obviously. The short report, I think, was not very accurate, but I believe that it does give you an indication there's still sales out there.

What kind of sales are they? Just to give us an idea of what's going on in the market.

What do you mean?

In-house or data center.

Those were all service bureau. Yes, our in-house sales were probably down rather than up. Well, they certainly were in the second quarter. And that is part of the - when we talked about the weak bank sales, it was really more on the one-time sales that was a little weaker than we had anticipated. And of course all those things impact that recurring revenue number that Scott talks about. I mean when we talk about having a 90 percent recurring revenue in a particular quarter, that goes hand in hand with those one time sales were down because if one time sales were up, then obviously the recurring revenue would automatically be lower even at the same number, be a lower percentage. Is that correct, Scott?

Yes.

If I'm perceiving that properly.

Lastly, Scott on the new debt facility, what size are you guys looking at right now?

What?

What size of a debt facility are you looking at?

At this point in time it's premature to give an exact number, but I would say somewhere in the 90 to 130 million dollar range.

Your next question comes from David Trafton. Please go ahead.

Could you talk to us a little bit about the SG and A or G and A run rates in the acquired businesses. And the large quarter pro forma numbers, looks like they're a lot lower than what was in the 8-Ks for the full year 2001. And Q2 looks like they've come down a little bit more even from there, on sort of a guesstimated pro forma business. How much more reduction is there for you guys if you just take over these businesses and run them a little bit better?

I think the obvious G and A reductions comes from administrative type costs, whether it be accounting, auditing, legal, things of that nature. As far as people, as we've always said when we acquire these businesses we don't really see any synergy for people because we bought them because they had good people and run a good show. So we're not really looking for any people reduction. However, I think it gets back to the earlier question that was posed as to I think Art Bender's question on where revenue growth comes from and why we did better. A lot of it is driven by scale. We think we've gotten the proper set up in place in both those organizations and as we continue to load more and more business there we think it goes in and levers up the G and A pretty nicely.

But even on an absolute dollar basis, in the 1 Q pro form ma I-Bill's, G and A was 6.4 million. Looks like we're down to something low 5's, even if you take out a little EPX from this quarter. Is it going to go down more or have we hit steady state?

No. I don't think you're talking about apples to apples in any type of closing situation. They can record their costs and get their orders and stuff cleaned up. So that's one thing. Secondly, the I-Bill transaction wasn't in for a full quarter. So I don't think you're on an apples-to-apples basis by looking at what the second quarter was vis-a-vis the first quarter. Separately, can you maybe talk a little bit more about this CRM product that you bought? It sounds like it's pretty small. But is there any install base anyway? Did you pay anything for it? Maybe I'm blind, but this seems pretty new to me.

No, and we actually mentioned it here for the purpose to say we have it, which is important to us. It's solely on an earn out basis. We thought we got a really great deal for it. There's minimal numbers of prospects in installed customers and they're even finishing out some of the programming and coding which we expect to be done within the next four to six months. But it's something that's pretty far along. As you know we've never been developers, where we want to start from scratch and get in, because those budgets always work to be higher than you ever put out there and always takes longer than you think. This one is done. We have beta sites set up. We like it because it can double as a platform product for us as well. Which gives us another product to go ahead and sale and puts us in a nice position to have that bundle of products that we always talk about just a little bit deeper and a little bit more complete.

You say solely on an earn out basis, but did you actually buy some employees who you're not paying unless this thing works, or is this more of a joint marketing thing?

When we acquired it we acquired the employees, programmers, developers and the sales personnel for that enterprise. They are now currently Intercept employees. But there's a handful of them. It's a small operation which we think we can go ahead and leverage our developing expertise and help them out.

Geographically where are they?

Georgia.

And I have one last question, maybe, Lynn, all the new business that you noted in the merchant processing side, some of those sound like they could be pretty significant customers. How far down the road do you think you are in terms of replacing some of the pay down business that goes away in the second half.

I think we're moving along pretty nicely getting that replacement. If you look at the press release, June 12th, significant - those dollars were not huge. I think the accounts we laid out for you right there go a long way to replacing that business.

Can you give those to us in order of size?

No. I gave them in order of jotting them on a pad.

Could you tell me which would be on the top of the list?

I don't think I have it, but Apple Vacation is probably the largest of those.

Okay.

Next question.

Your next question comes from Gary Prestopino [ph]. Please go ahead.

What was your cash flow from operations?

I knew you would ask it but I didn't have a finalized working cash flow, so that's something I'll be happy to get to you.

What did you say blended internal growth was?

14.0. It was 13.6 in the financial institutions group, at about 22 percent in the merchant group, which resulted in a 14.0.

As I look at your breakout for financial institutions, it looks like the gross margin on service fees was down quarter-over-quarter, six months over six months. Is that a result of some of these acquisitions that you've made?

It's a combination of the acquisitions but an affirmation that one-time software sales which carry a higher margin were down as well.

And then just getting back, Scott you mentioned you're not changing your guidance. Really do you think that whatever happens on the software side that could impact where you are or where you feel you'll be may be made up in the merchant processing side?

I think it's a combination of the stronger merchant side as well as stronger continued ATM debit and communications really is I think it goes back, as John said earlier, we've got a diversified product set that the main reason for bringing up the whole softness and the in-house market and the deferral of decisions is really that it is there and everyone should know about it. That we have seen it. That we had a good month in July but our hope is that continues until we see it we just don't know.

Okay. Thanks.

Next question comes from Jeff Baker. Please go ahead.

Scott, can you follow up -

You already had a turn.

But I'm going to take another one since there are no others in the queue. Could you talk about the tax rate going forward and what we can expect, and can you just go ahead and tell us that guidance one more time, thanks.

The guidance on the tax rate is 37 and a half to 38 percent. We've got some opportunities and some planning that we think we could bring it down but we feel good those numbers are correct.

I was referring to the guidance for top line and bottom line for this year and next.

The guidance we had given even on the June 18th or June 12th conference call that Carol mentioned earlier was that we would do between a dollar 15 and a dollar 17 this year to a dollar 43 to a dollar 45 next year and that net revenues would be in the 205 to 215 million dollars this year and the 265 to 275 million next year.

265 to 275. Does that include I-Bill and EPX and everything?

Fully loaded total company. Consolidated basis.

Does that include the new CRM business you just purchased or were there any revenues associated with that at all?

There's no current revenues associated revenues to speak of, but that's everything. That's fully inclusive of everything you all know about.

And then do you have a breakout of the organic growth between I-Bill and EPX? And that's it, thanks.

It's not really measurable at this point in time. I mean there's little pieces from each but I do not.

Okay. Great. Thanks.

Thanks for calling, sir. No further questions.

Well, we appreciate your attendance and attention and we'll continue to look forward to future quarters that we can just continue to do what we say we're going to do and keep trying to run this business appropriately. Thank you

Thank you, this concludes today's conference call. Please disconnect your lines and have a great day.