Fidelity National Information Services Inc (FIS) 2002 Q4 法說會逐字稿

Good afternoon and welcome to the Q4 2002 earnings release for Wednesday March 5, 2003. Your host for today is Carol Collins. Miss Collins, please go ahead.

Thank you. Good afternoon.

The purpose of this call is to review InterCept's financial and operating results for the fourth quarter and year ended December 31, 2002 and our future guidance.

During the course of this call, we will attempt to update you on our expectations for 2003 and make several forward-looking statements. Anything we say concerning our projections, expectations and beliefs for our future operations, growth, prospects, strategies, business or financial conditions is a forward-looking statement. These forward-looking statements are not guarantees of future performance. They are subject to risks and uncertainties, many of which are outside of our control, that may cause our actual results to differ materially from those expressed or implied by forward-looking statements.

These risks and uncertainties include whether we can continue to sustain our current internal growth rate or total growth rate; successfully close and integrate acquisitions of assets, businesses and other operations; continue to provide enhanced and new products and services that appeal to our financial institution and merchant customers; access the debt and equity capital we need to sustain our growth and achieve our sales objectives. Other risks include the possibility that credit card companies may fine us for excessive credit card chargebacks or other issues arising out of our merchant services operations, the possibility that the termination of customers and other changes in our merchant services could adversely affect its value and result in the impairment of that asset or other intangible assets which would require us to record additional impairment charges in our statement of operations and the stock price volatility associated with small cap companies. These and various other factors are discussed in detail in the section in our most recent report form 10-Q entitled "Management Discussion and Analysis of Financial Conditions and Results of Operation Disclosure Regarding Forward-Looking Statements."

I'll now turn the call over to John Collins. Thank you, Carol. Thanks for joining us today. With me is Lynn Boggs, our President and COO, and Scott Meyerhoff, our CFO.

As I'm sure most of you know, a class-action lawsuit has been filed against InterCept here in Georgia. We believe the lawsuit is without merit, and we plan to vigorously defend it. Unfortunately, that has affected our ability to communicate with you as we normally might do. On advice of our council, we will change the format of the call today. We'll give you detailed explanations of our financial results and our operations, but will not conduct a question-and-answer session as we usually do.

I apologize for the change in the format and know that we won't be able to answer all of your questions this way. Hopefully we have addressed most of the questions. We've at least attempted to do that. We made every effort to put as much detail into this as possible and certainly hope that you understand the situation we are in. I will turn it over to Lynn Boggs, who is going to give you a prepared statement, and then Scott will discuss the financials.

Thanks, John. Good afternoon.

I would like to take a few minutes today to go over some of the operational highlights for Q4 2002, the year 2002, and a short update on where we are year to date 2003.

On February 11, 2003, we announced an amendment to the iBill purchase agreement in settlement of remaining escrow issues. As originally structured, the purchase provided for an earn-out to be paid to the prior owners of iBill if the business met an EBITDA goal. To protect that earnout prevent us from hindering the ability to reaching EBITDA goa,l it would hinder InterCept's ability to make changes to the business.

However, after nine months of operating iBill, we determined we needed to go in another direction with the business and negotiated a settlement to give us ability to do that. There was $10.5 million remaining in the purchase price escrow account. InterCept received $8 million of that money, and the rest was distributed to the prior owners. In addition, the earnout provision of the agreement was eliminated. We agreed to indemnify the prior owners from claims resulting from process-related activities that occurred before InterCept bought the business. What all this means is that InterCept gained complete operational control over the iBill business, with the flexibility to make changes we believe necessary to run the business.

With that in place we brought in John Perry to develop a plan for all of our merchant operations. During his first 30 days, John rationalized the business plan for all the merchant businesses, identified cost reduction opportunities and synergies among the businesses. He also continued our move to assure our businesses and customers comply with all card association rules. John has also begun to refocus the sales force on our philosophy of focusing on financial institutions and has brought in several key management people to do so. The results of all these changes is a newly restructured merchant operations, which will be known as InterCept Payment Solutions. As we move forward with this business plan, our merchant operations will operate as a single business unit with a unified management team and a focused strategic direction.

That's how we got where we are today. Where do we go from here? We continue to believe that the payment processing industry is a growing market and a place we want to be in the future. It is a large market and there's a great opportunity to offer products to smaller financial institutions and small to midsize merchants. We also believe that opportunities exist in related markets such as processing cards and ACH for [INAUDIBLE] merchants.

Our strategy will be to position InterCept as a bank center provider and focus on sales, service and distribution for banks. We will look to acquiring portfolios, and we'll seek to establish new relationships with financial institutions and retail merchants. Our leverage and our existing relationships from our traditional processing business, we plan to use the bank channel to drive new revenues to grow the business.

How do our different merchants and businesses fit into this figure? EPX, which is a great technology, we will use this to focus technology efforts on EPX and integrate it with iBill front end. Once this is done, we believe we'll have one of the strongest technology offices in the industry.

We previously discussed the attrition iBill. All this related to customers in the adult entertainment business who were not complying with the card association rules. This attrition has slowed since January.

Moving to item processing, our overall strategy and IP operations continues to be the movement to increased use of technology. In other words, to move away from traditional, manual-intensive processing to an image-enabled process. At this time, every one of our item processing centers is image-enabled, and approximately 70% of our customers have been converted to image. The move to image has enabled us to consolidate several centers. In Dallas, Houston and Miami, we have consolidated our operations to a single center in each of those cities, which has allowed us to reduce head count and lower expenses.

In addition, the assets we acquired from ACS in July of last year continue to have a positive effect on IP operations. We have spent approximately $5 million in Cap Ex to upgrade those centers from a traditional processing to image-enabled. Those upgrades allowed us to significantly reduce our overhead in [INAUDIBLE] New York, and we also integrated those centers with the call center in New Jersey, which has enabled us to move both customers and employees between centers to improve efficiency. We did lose one of our largest customers which was processed out of our New Jersey center. That customer decided to process their own in-house. It's unfortunate to lose that customer. Shifting the business from [INAUDIBLE] to Woodbury has helped us, and we look to replace that business with other banks.

Another positive from the ATS acquisition has been the addition of lock box processing services. Prior to the acquisition, we did not provide this service. However, this has turned into a very nice new product for us, and we continue with that portion of the business. We recently added lockbox processing for a large New York City utility and also added a large bank customer with $100,000 a month in processing revenues. We believe that this service will continue to grow as we increase our presence in the northeast.

In the fourth quarter, we announced the opening of a center in Burbank, California. That center has performed well for us. We continue to add customers and that center will become profitable in the first quarter this year.

On the Sovereign contract, that was approved by the Boards of both InterCept and Sovereign, and we executed a final agreement January 14. Our conversion and operations people are moving full steam ahead to bring Sovereign's operations on board. Scott will address the financials surrounding this deal in his financial discussion, including some detail on Cap Ex. From an operational standpoint, the Sovereign operations are set up in two groups, New England and mid-Atlantic. We'll convert those separately. The New England first in early July and the mid-Atlantic in the November-December time frame. I want to emphasize those dates are current expected dates of conversion, and any delay in the dates would delay our recognition of revenues from that transaction while recognizing the expenses.

Finally a word about our check volumes, which we purposely reported were unexpectedly lower in the fourth quarter. We continue to see sluggishness in item volumes and believe that the economy continues to be a drag in this area. So far in 2003, our checks are flat year-over-over. We are currently not forecasting much growth in this area for the next six months, as we believe the economy and the potential for military conflict will hold down business and we factor this into our guidance for 2003. In the event things pick up, obviously that would work in our favor. We are staying fairly conservative in our forecast.

Our core products continue to be a solid business for us. From a product development standpoint, we had no new major developments in 2002, although we did release a new version of our [INAUDIBLE] software. This release went out in the fourth quarter of 2002 and has more enhancements than prior releases have ever been issued. We began the roll-out in the fourth quarter and it will continue to roll out during the first quarter of 2003. Initial feedback from customers has been positive, and we believe the enhanced functionality will help new sales in the area.

On customer service, we implemented an initiative in 2002 that we believe will improve our customer service and enhance [INAUDIBLE] sales. We added a group of representatives, that we refer to as Account Managers, who were initially responsible for relationship management for our core processing customers. These employees gave each core customer a single point of contact for all their customer service issues, greatly improving communications. With the relationships established, these account managers will focus on driving revenue in 2003 and work on utilizing relationships to cross sell our other products. In addition, we have added our EFT customers to this initiative, and we believe this will improve that portion of the business as well.

In general, sales of core systems look to be flat year-over-over. One-time sales continue to be very sluggish. Just no pickup yet in this area. Our sales of in-house core systems are down slightly, but total sales of core systems are relatively flat. Looking at the market, our pipeline continues to grow, but the sales cycle continues right along. We don't believe we are losing opportunities for sales, it just takes longer to get a sale closed.

The decision makers at financial institutions continue to be cautious and conservative when making a decision to change systems, whether it's job losses in the local areas, potential loan losses or the overall economy and war concerns, these people are very deliberate in the sales process. We see banks utilize consultants more often in making decisions, and more than ever boards of directors are getting involved in the decision making process. Also, the regulators appear to have increased their scrutiny over financial institutions, are recommending more and more that customers use service level agreements in contracts with all of their vendors. None of these factors have impeded our ability to make new sales, but all serve to lengthen the cycle for new core systems.

Based on the discussions with our sales group, we are not seeing a great deal of pricing pressure in our core systems; however, we are seeing more competitive pricing of in-house products. Obviously, we will be as competitive as we can be on pricing, but the slow sales cycle combined with the lower margins in some one-time products will continue to pick this part of the business until the overall industry and the economy improves.

In our EST businesses, we have seen several core processors enter the business, which has created some pricing pressure in this area. Although we have had to increase pricing to make new sales, the total volume of transactions for 2003 appears to be approximately 20% higher than the same period last year. We are comfortable that the sluggishness we experienced in the fourth quarter was due to a slow holiday season and that the lower volumes are not recurring in nature.

We often get questions involving ourselves as [INAUDIBLE] institution. This continues to be a solid market for us. Our new [INAUDIBLE] customers in the fourth quarter were slightly above the run rate for all of 2002. And looking at the first quarter, the run rate is even higher than in Q4. We have already closed several new [INAUDIBLE] in January and February and several more in the pipeline. So despite concerns of some people that this market is shrinking, we have not seen a slowdown in the area and we believe it will continue to be a solid business for us going forward.

Speaking of new product development, this is one management change we made that has not been publicly announced until now. We are happy to announce Donny Jackson has rejoined InterCept as an employee. Donny was a director of InterCept and previously served as president and Chief Operations Officer from 1996-2002. He left InterCept in October 2000 to become the CEO of Netzee, Inc., and he remained in that role until Netzee's acquisition by [INAUDIBLE] in December. Donny is going to manage our technical service division and integrate efforts across all of our product lines with focus on core and auxiliary products. [INAUDIBLE] resigned from the Board of Directors February 18 and we have begun the process to fill his new position on the board.

With that I'll turn the call over to Scott.

Thanks. I'm going to take a little time and discuss historical P&L for the fourth quarter and year to date 2002 and discuss the balance sheet on an item by item basis as well as discuss key factors that go into the 2003 guidance.

The results for the fourth quarter and year to date are as follows: Excluding customer reimbursements, revenue grew to $60.7 million from $38.5 million in the fourth quarter of 2001, a growth of 57.5%, although down more than $1 million from the fourth quarter of 2002. Revenue from the financial institutions segment grew to $41.3 million from $38.0 million in the fourth quarter, with a growth of 9%. Revenue in the merchant processing segment grew to $19.4 million from $500,000 in the fourth quarter of 2001, although that segment was also down over the third quarter. The growth there was largely attributable to the acquisition of EPX that was closed during the second quarter of 2002 that we received a full year of benefit for in the year 2002.

Each year we're required to review the assets carried on the balance sheet to analyze them for impairment. Based on this review, we concluded that identifiable, intangible and unidentifiable assets were impaired and as noted in our financial statement took a charge of approximately $20 million during the fourth quarter of 2002. This charge on EPX and IBill intangible assets is recorded in the financial statements.

In our conference call on January 10, we said we believed we were in compliance with the financial covenants of the senior credit facility with Wachovia. At that time, we didn't know if we would have an impairment charge, and if so, what that charge would be. We now expect that to be a $20 million impairment charge and that coupled with the losses with the cleanup of Netzee will cause us to be in default under one of our financial covenants when we deliver our statement to Wachovia later this month.

We are in discussions with Wachovia to amend our credit facility to include making monthly or quarterly principle payments paying off the facility earlier than the June 2004 date, possibly as early as January 1, 2004. We don't know whether our discussions will result in an amendment to our facility or a waiver of the covenant at issue. If we agree or if we cannot agree on an amendment or waiver, we will have to refinance the facility with another lender. Although we believe we'll be able to refinance the facility, we may not be able to do so before an event of default occurs under it, which would cause the debt to become a liability. Any refinancing may be with less attractive terms.

One other additional cleanup item to discuss is Netzee. As of December 31, Netzee sold assets to Certegy. InterCept owned 28% of Netzee common stock and jointly with [INAUDIBLE] provided Netzee with a line of credit. InterCept received approximately $500,000 for common stocks on the books at a value of zero. InterCept also received approximately $2.3 million in cash for full satisfaction of this note that was on its balance sheet at $8.3 million. The transaction resulted in the net loss of $5.5 million that was approximately $1 million less than the previously disclosed amount in the January financial statement conference call. We no longer reflect our shares of Netzee losses on our consolidate financial statement after the December 31 sales.

Net income available to common shareholders excluding the amounts related to Netzee and the impairment charges decreased to 2.8 million or 14 cents per share in the fourth quarter of 2002 from a total of $4.9 million or 26 cents per share in the fourth quarter of 2001. In regard to revenues, the increase was attributed to growth through acquisition as well as internal growth. Internal growth for the banking sector was approximately 1% during the fourth quarter. This number was significantly down due to a number of factors that Lynn had discussed regarding volumes. The merchant segment was south of 5%.

Another important measure for us was recurring revenues. During the fourth quarter, recurring revenues was approximately 94%. This gives us a good base to grow from but indicates the magnitude of the nonrecurring revenue shortfall that carries high gross margins.

Gross margin totalled 53.5% for the fourth quarter as compared to 60% for the fourth quarter of 2001. The gross margins for the banking group were about 50.5% and the gross margins for the processing group were approximately 59.6%. With SG&A as a percentage of sales totaling 38.3% that was up 400 basis points from last quarter due to lower revenues and higher SG&A costs.

Despite the difficult performance and difficult environment we faced in the fourth quarter we continue to post solid EBITDA. EBITDA excluding the impairment charges totalled 9.2 million for the three months ended December 31, 2002, which is a solid number for us.

To get into the balance sheet analysis, just a couple key factors. As of December 31, we had approximately 44.01 million short and long-term debt under our $50 million debt facility. We had $18.2 million outstanding on our CD secure facility secured by $19.2 million in the short-term investment caption on our balance sheet.

As Lynn talked about, subsequent to year end we settled the escrow arrangement with the previous owners of iBill and continued to pay down debt with free cash flow from operations. Counting the $8 million we received and the amounts paid down with free cash flow, that brings the outstanding debt balance to $32 million as of today, which is significantly below the $44 million, giving us nearly $18 million of availability under the facilities.

Our accounts receivable continues to improve due to strong collection efforts. As of December 31, DSO's were approximately 40.2 days, which is nearly one day better than where we were in the third quarter and better than where we entered 2002. Advances total $7.5 million as of December 31.

Subsequent to year end, we received a payment of $500,000 on that note. The note is due in full on June 30, 2003, and insured by shares of InterCept common stock. We'll continue to monitor the note and monitor on a quarterly basis. As of this date we believe the receivable is collectable.

Inventory pre-paid and other has increased primarily due to an income tax receivable of $2.4 million, that is the receivable related to the loss that we have recorded on Netzee. We have filed with the IRS for a refund and these moneys have not yet been received or included in cash or as a reduction of the $32 million in debt we discussed.

Intangible assets have decreased 22.1 million due to the $21 million charge in our merchant group of iBill EPX which arose out of our analysis of the balance of the company. Other assets increased to approximately $5 million due to additional moneys held by processors, both current and new processors on the merchant banking unit, as well as additional amounts in deferred taxes. On the liability side of the business, debt balances continue to decrease. They decreased $4 million from free cash flow and $8 million from the moneys received in the escrow.

Client payouts increased by $7.0 million. As you can see on the asset side, cash went up by $8.7 million, so even with holding additional customer moneys, we have increased our cash and continue to pay down debt. As of December 31, we have $24.3 million cash on our balance sheet which is up significantly over the third quarter.

A couple other key metrics to discuss include cash flow from operations for the 3 and 12 months ended December 31, 2002, were nearly $18 million for the fourth quarter and $45 million for the full year. This amount has gone up in large part due to the operations to the company but also due to client payoffs we just discussed. Capital expenditures for the three and twelve months ended were $3.7 million for the fourth quarter and nearly $14 million for the full year.

In regard to the 2003 projections, we announced the 2003 guidance would be between 80 and 90 cents per share excluding non-recurring charges which we currently do not anticipate. Due to initiatives currently under way, including the Sovereign contract, the conversion, and the expenses early in the year until the conversion is complete, which we anticipate could be $2-4 million of operating expenses which we would run to the P&L prior to the conversion in July and prior to the second conversion in November, the updating of our EFT platforms upon conclusion in September will save us $100,000 in operating expenses. The updating of the centers acquired in the ACF acquisition, as Lynn talked about, would result in nearly $100,000 a month savings in May, and the combination of our merchant groups will bear greater progress as the year unfolds, these initiatives are a large part of the reason this forecast is back-end loaded and have significantly greater earnings per share in the third and fourth quarter rather than the first and second quarter.

With all that being said, we enter 2003 from the financial standpoint with a good amount of cash on the balance sheet, with a good amount of challenges ahead of us but challenges we think we can handle. With that said I'll turn it over to John.

Again, let me apologize for the change in the format and not taking your questions, we hope we've adequately anticipated the questions and answered those in the presentation. We hope you understand the situation we are in as it relates to the lawsuit. Thank you for your attention. We appreciate it.

This concludes today's conference call. Please disconnect your lines.