Safeguard Scientifics Inc (SFE) 2003 Q4 法說會逐字稿

Good day, everyone. My name is Max and I will be your conference facilitator today. At this time, I'd like to welcome everyone to the Sanchez Computer Associates 2003 fourth quarter and year end operating results conference call. All lines have been placed on mute to prevent any background noise. Before beginning, the Company has asked me to read the following Safe Harbor statements.

Today's conference call contains forward-looking statements about the Company's future performance and the merger transaction with Fidelity National Financial and may include -- without limitation -- statements concerning Sanchez's expectations of the impact of 2003's fourth quarter restructuring charge on the Company's performance and the expected benefits of the cost reduction plans. Forward-looking statements include information about possible or assumed future financial results of and events involving Sanchez and usually contain words such as believes, intends, expects, anticipates, or similar expressions. Our discussion today contains statements related to future events and expectations and such statements are forward looking statements. These forward looking statements are subject to known and unknown risks. Uncertainties and other factors that may cause (indiscernible) Sanchez's actual results, performance, or achievements to be different from those expressed or implied in our statements.

FNF and Sanchez expressly disclaim any duty to update or revise forward-looking statements. The risks and uncertainties to which forward looking statements are subject include but are not limited to the effect of governmental regulations, the economy, competition, and other risks detailed from time to time in management's discussions and analysis section of FNF and Sanchez's Form 10-K and other reports and filings with the SEC.

In addition this conference call does not constitute any offer -- an offer of any securities for sale or solicitation of proxy in connection with a proposed transaction between FNF and Sanchez, the registration statement, prospectus, and proxy statement will be filed with the Securities and Exchange Commission. Investors and shareholders are advised to read these and all related documents when they become available because they will contain important information.

Investors and stockholders may obtain a free copy of the registration statement, prospectus, proxy statement and related documents when they become available from the Securities and Exchange Commission's website at www.SEC.gov. Free copies of these documents may also be obtained at Sanchez's web site at www.Sanchez.com and at FNF's web site at www.FNF.com.

In addition to the registration statement, prospectus, and proxy statement Sanchez and FNF file annual quarterly and current reports, proxy statements and information with the SEC.

Michael Sanchez, Chairman of the Board, will be leading the call and Todd Pittman, Chief Financial Officer, will provide financial highlights. Frank Sanchez, Chief Executive Officer, and Joseph Waterman, President and Chief Operating Officer, are also participating in the call. A question-and-answer session will follow the management's discussion of 2003's fourth quarter and year end operating results.

[Operator Instructions] Thank you.

I'd now like to introduce Mr. Michael Sanchez, Chairman of the Board. Mr. Sanchez, you may begin your call, Sir.

Thank you, Matt. I think that was probably the first time the announcer's speech was going to be longer than the Company's but given the situation, I think it's appropriate.

Good afternoon and welcome to Sanchez's fourth quarter and 2000 year end conference call. Before we discuss results I'd like to comment on the recent announcement of the pending merger between Sanchez and Fidelity National Financial. As you know January 28, 2003, we announced our merger being with Fidelity Nat'l Financial at $6.50 per Sanchez's share, payable to 50 percent in FNF stock and 50 percent in cash. Subject to shareholder elections, probations, and adjustments under certain circumstances.

FNF has entered into a voting agreement to support the transaction with Sanchez shareholders holding in excess of 40 percent of the common vote and we expect the transaction to close in the second quarter of 2004, subject to approval by Sanchez shareholders and customer regulatory and other conditions.

As we said at the time we believe that our accommodation with FNF will produce a compelling value proposition for banks and other financial services institutions that plan to transform to an online real-time infrastructure, becoming a part of a much larger company that is focused on the financial services market is the best way for Sanchez to realize its growth potential and to overcome the issue of our relative size (indiscernible) large banks make buying decisions. Our Board of Directors carefully examined all the options available to us and ultimately determined that the transaction we announced with Fidelity was in the best interest of our shareholders, our customers and our employees.

We believe this is the right move at the right time for our Company.

As you also know, this discussion does not constitute an offer for any securities for sale. We have filed the merger agreement and related documents with SEC and they are already publicly available to the SEC website. FNF and Sanchez will be filing registration statements, proxy statements, and prospectuses with SEC which will contain customary detailed information about the transaction including the background and both companies' reasons for pursuing it.

You'll be advised to read these filings when they become available because they will contain important information and we ask that you defer your questions about these matters until the filings are available.

Todd, our CFO, will be discussing financial results for the quarter and the year momentarily, but first I'd like to briefly highlight some of the accomplishments of 2003. We've launched a direct bank for Schwab Corp. through our outsourcing and banking business unit. Schwab utilizes a full suite of Sanchez banking software products. We launched ING Direct in the UK becoming the sixth ING Direct to launch globally. ING Direct is the largest and we believe the fastest-growing direct bank in the world. Sumitomo Mitsui Banking Corp. one of the largest banking institutions converted Pars corporate banking operations to profile banking platform. This is the fifth global region Sumitomo has moved on to the profile system.

In Poland, Bank DZ purchased and implemented the profile banking and CRM solution. RBC Financial Group -- Canada's largest bank -- went live with Sanchez mutual fund's order management system -- 1600 financial planners at 1300 locations use this system to provide third party mutual fund order management.

And finally, Sanchez became the first financial services software vendor in the world to have a core banking processing system running its production on a LINUX platform at the First Mortgage KFT in Hungary.

Now I'll turn it over to Todd to review financial highlights of the year and the quarter. Todd.

Thank you, Michael. Good afternoon. As reported in our press release this afternoon, for the fourth quarter of 2003, we are reporting 24.2 million in revenue and a net loss of three cents per share on a fully diluted basis. And for the year the Company posted revenue of 96.4 million and a net loss of 38 cents per share. Our reported quarterly revenues exceeded the high end of our previously provided revenue range, our quarterly earnings -- which include the preannounced impact of a restructuring charge -- was within our net loss range of negative 2 to negative 5 cents per share.

Commenting briefly on highlights in our quarterly revenue performance. Product revenues decreased 3.9 million from a year ago. Although licensed expansions from existing clients were down compared to a year ago, the Company continued to recognize revenue from the roll out of Scotia Bank and (indiscernible) Bank. From our wealth management client World Bank and from expansions across the number of clients including ING and Intelago (ph).

Our reporting services revenues increased 1.1 million compared to the same period last year. In addition to revenue recognized from the continued roll out of clients in the implementation process the Company also experienced significant increases in services from its European installed customer base and benefited from a net increase in the accretion of previously deferred services revenue.

Processing revenues were in line with that reported a year ago. Although we generated increased processing revenue from the launching of Schwab Bank earlier in the year, this increase was offset by decreases in processing revenue from the discontinuance of processing services provided to Juniper Bank as previously disclosed in our second quarter 10-Q, and the reduction in rates and services provided to other clients during the past year.

A larger installed client base, maintenance associated licensed expansions during the past year and an increase in other miscellaneous revenue items contribute to an increase in software maintenance fees and other revenues of approximately 700,000 compared to a year ago.

Turning to the expense side. Our product development cost increased approximately 1.3 million compared to the same period last year. A majority of the change and product development expenses relates to an increase in the net accretion of cost under SAB (ph) 101. Increases in overhead expenses and third party software cost also contributed to the increase experienced in our product development line items.

Services expenses increased to approximately 1 million from the same period a year ago. The increase in services expense is primarily a result of higher net accretion of services expenses, which is partially offset by lower compensation and external consulting expenses.

The 24 percent margin realized on our services revenue is off slightly from the 26 percent margin reported a year again and up from that which we reported in the second and third quarter of this year. The staffing adjustments we have been making in the services area during the past year have begun to be reflected in our reported results and are expected to continue to improve as we move through 2004.

Processing costs rose slightly from a year ago and processing margins in the fourth quarter remained below our targeted levels. The primary driver of the increase in our processing cost was a result of pure resources in our data center being allocated to implementation projects during this quarter as compared to a year ago.

It is our expectation that staffing reductions we initiated in the fourth quarter of 2003 will contribute to us realizing higher margins as we move into 2004.

Our sales and marketing expenses decreased approximately 750,000 from a year ago. Reduced staffing levels was the primary driver of this decrease. In addition a decrease in commission from travel and entertainment related expenses also contributed to lower sales and marketing expenses this quarter.

As preannounced in our third-quarter earnings call, the Company reported a $1.3 million restructuring charge related primarily to a reduction in force the Company initiated in October. The primary component of this charge related to severance payments the Company expects to make those individuals impacted by the reduction in force.

For the quarter the Company has recorded an effective tax rate of approximately 50 percent which is reflective of the benefit the Company anticipates realizing from it extraterritorial income entity tax filing.

Some brief comments on the balance sheet. Our cash position remains strong with approximately $28.5 million at quarter end and with no debt. Our receivables increased modestly from a year ago. However, our day sales outstanding continued to improve and stood at 59 days as we ended the year.

At year end, the Company's balance sheet reflects $18.5 million in deferred SAB 101 related revenue and deferred SAB 101 deferred pretax margin of 5.2 million. This concludes the Company's prepared remarks regarding the fourth quarter 2003.

At this time, we would like to turn it over to Max to enable the participants on the call to ask questions.

[Operator Instructions]

Glenn Green (ph) at Think Equity Partners.

Michael, just one question related to Fidelity National and, obviously, they announced their acquisition of [indiscernible] yesterday. I was wondering sort of give us a sense of sort of what the plan might be, what platform maybe going for -- I mean they own a piece of Alltel now you or potentially you and potentially [indiscernible] wondering sort of what the transition plan is?

I think that's premature to actually talk about that at this point. Because it's still being resolved.

Okay, thank you.

The only thing I can say what I know about our platforms is that our systems are certainly in the future of the business.

Okay.

[Operator Instructions].

At this time, there are no further questions. I would like to turn the call back over to Mr. Sanchez for his closing remarks.

Thank you, Max, and thank you, everyone, for supporting us in our last six, seven years of being a public company. We look forward to following through with Fidelity.

Thank you for participating in today's conference call. This call will be available for replay beginning at 7 PM Eastern Standard Time today through midnight PM Eastern Standard Time on February 24th, 2004. The number to dial for the replay is 1-800-839-4198. Replay is also available through the Company's Web site at www.Sanchez.com. Thank you.