Exhibit 99.2
S1 CORPORATION
TRANSCRIPT OF CONFERENCE CALL HELD APRIL 26, 2006
Remarks made by John A. Stone
I'd like to remind you that we will be making forward-looking statements today.
These forward-looking statements are based on our current expectations and are
subject to a number of uncertainties and risks. Actual results may differ
materially. Please refer to the risk factors identified in our Form 10-K for the
period ended December 31, 2005 and our subsequent public filings with the SEC.
In just a minute I will hand the call over to Chip Mahan, our Chairman and Chief
Executive Officer, but first, I'd like to make some brief comments on the
financial tables included in our press release this afternoon.
As the release indicates, in the first quarter, we generated revenue of $48.5
million, an increase of $2.6 million over the fourth quarter of 2005, and we
generated $3.2 million of adjusted EBITDA which excludes stock based
compensation and restructuring charges related to actions taken in the fourth
quarter of 2005.
Some of the comparisons of our first quarter results to previous periods are
impacted by the inclusion of stock based compensation expense in our 2006
results with the adoption of Financial Accounting Standard # 123r. This
accounting standard was adopted prospectively, so prior periods do not include
these costs. We have provided footnotes to the tables so that you can see the
amount of stock based compensation included in each line impacted.
Another change you will see is in the segment tables. In addition to the Risk
and Compliance segment we disclosed in the fourth quarter, we are presenting the
Enterprise segment, run by Group President Matt Hale, which includes the North
American retail banking solutions, global wholesale banking solution, and State
Farm. We are also presenting the Postilion segment, run by Group President,
Johann Dreyer, which includes the community financial business in North America,
ATM/payments business globally, and the retail banking business outside North
America.
Before I comment on the segment results, looking at the consolidated statement
of operations in Table 1, we reported $554,000 of income from discontinued
operations in the first quarter and this is related to the sale of the Edify
business in 2005, a settlement related to a working capital adjustment. You will
also see $333,000 of restructuring charges in the first quarter, which is
severance related to employee actions taken during the fourth quarter of 2005
where certain employees were on transition schedules that ended during the first
quarter of 2006.
Without the stock based compensation expense, the business generated $600,000 of
income from continuing operations, and $900,000 if you exclude the restructuring
charges related to actions taken in 2005. Again, adjusted EBITDA was $3.2
million.
Moving now to the segment results for the first quarter on Table 4, and I will
be making comparisons to tables 5 and 6, which show the same format for the
fourth and first quarters of 2005.
The Enterprise Segment generated $25.9 million of total revenue, $1.9 million
more than the 2005 fourth quarter, the largest increase being $1.3 million in
professional services principally related to the State Farm business, and a
$900,000 increase in data center revenue driven by a significant new customer
going live in our hosted environment. License revenue of $2.9 million is up
$500,000 from the fourth quarter of 2005, and includes approximately $1.0
million of subscription revenue which is essentially flat with the fourth
quarter. The remaining $1.4 million of license comes from perpetual licenses of
additional modules or seats to existing installed customers. These increases in
revenue are partially offset by a $600,000 decrease in other revenue, which is
pass through hardware revenue.
Operating expenses for the Enterprise segment decreased $5.0 million after
isolating restructuring charges and stock based compensation; this largely due
to the fourth quarter restructuring occurring in the middle of the fourth
quarter and some of the employees affected were on transition plans through the
end of the year. In short, the fourth quarter restructuring generated a
reduction in cash expenses in this segment of $20 million on an annualized
run-rate.
As the reconciliation at the bottom of table 4 indicates, the Enterprise segment
generated adjusted EBITDA of $1.1 million during the first quarter.
The Postilion segment generated total revenue of $17.5 million, an increase of
$1.9 million over the 2005 fourth quarter, with all revenue categories
increasing between 6 and 21 percent. License, support and maintenance, and
professional services revenue increased largely due to strong sales of our ATM
and Payments product, while data center revenue growth was driven by continued
bill pay adoption.
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Operating expenses for the Postilion segment decreased $1.1 million after
isolating stock based compensation and restructuring charges principally in the
international retail unit. Again the decrease is largely due to the fourth
quarter restructuring occurring in the middle of the fourth quarter.
As the reconciliation at the bottom of table 4 indicates, the Postilion segment
generated adjusted EBITDA of $2.1 million during the first quarter.
In our Risk and Compliance Segment, which is essentially the FRS business,
revenue was down $1.2 million from the fourth quarter, however, operating
expenses were down by more than $1 million, keeping the business at essentially
break-even operating margin and EBITDA. FRS had a strong bookings quarter, with
total bookings of $6.5 million in the first quarter compared to $12.2 million
during ALL of 2005. In the first quarter, FRS booked $3.9 million in
subscription licenses, of which only $70,000 was included in the first quarter
results. These subscription bookings will be recognized over an average term of
5 years.
On a consolidated basis, our Gross Profit Margin was 51%, a significant
improvement over the fourth quarter, and we anticipate that as we continue to
execute on our business plan that percentage will improve.
Balance sheet
Cash and short term investments were $115 million as of March 31, 2006, down
approximately $14 million in respect of the $14 million payment of the
contingent purchase price for the Mosaic acquisition. As I have said, adjusted
EBITDA was $3.2 million, we had capital expenditures of $3.3 million. Net Debt
service is zero. So the business was essentially at break-even free cash flow in
first quarter and we expect Capex to be down on a quarterly basis going forward
during 2006.
Accounts receivable increased $3.7 million related to seasonal billings of
annual maintenance as you can see a larger increase in deferred revenue related
to this seasonality. DSO was 97 at the end of the quarter. Approximately $24
million of our receivables are unbilled, three quarters of which related to
projects accounted for using percentage of completion or proportional
performance, where revenue is recognized as work is performed and billings occur
based on the achievement of periodic project milestones. DSO on the billed
portion of receivables is 53 days. We anticipate DSO will come down going
forward in 2006.
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On the fourth quarter call, we made a point to boil down the expenses of the
Enterprise and Postilion segments of the business to get to a cash expense
run-rate exiting 2005 of $41.5 million, and revenue of roughly $40 million.
Clearly revenue is up $3.7 million for these segments combined. On the expense
side, if you remove the stock based compensation and restructuring charges that
relate to actions announced in the fourth quarter, we are at $40.2 million in
cash expense run-rate in the first quarter. The management team is executing a
plan that is designed to grow EBITDA and create long-term value. That plan will
require hiring some additional staff while controlling other costs.
Consequently, the cash expense run-rate will likely rise as we proceed through
the year and execute against our plan.
In summary, the first quarter results indicate the realignment of the business
is taking hold - growth in revenue, costs contained, and positive cash flow from
operations. Now that I have reviewed the numbers, I'll hand the call over to
Chip to review some of the operational accomplishments.
Remarks made by James S. Mahan, III
I am pleased with our performance in Q1, the first full quarter with our new
management team and organizational structure in place. While these numbers are a
testament to the early progress we are making and the momentum we've
established, they are only part of the story. I'd like to provide some color for
you on our first quarter accomplishments in the context of how we run this
business and the three key objectives I've spoken about on our previous calls.
These objectives are:
- First, taking care of our current customers on some of our heritage
solutions, and reinvesting in those businesses
- Secondly, moving our Enterprise customers to one-or-two common
versions of our software to improve customer satisfaction and reduce
expenses
- and thirdly, working closely with our Managed Introduction Program
customers on the delivery of Enterprise 3.5, ensuring that we get it
right straight out of the gate.
Let's start with our Postilion business. Evidenced by the numbers that John
shared with you, Johann Dreyer and his team have done an excellent job in
getting our community bank customers and employees re-engaged. These customers
are now getting the attention and focus they deserve.... Through our investment
in this product suite, these customers are about to receive new enhancements
that they haven't seen in several years. For example, in the first quarter, we
announced a strategic partnership to offer our customers multi-factor
authentication solutions. Within 45 days of this announcement, we integrated
that product and began testing the solution with several customers. We are on
track to go live on this solution in our data center next month. In addition, we
are well underway with developing the next generation of self-service banking
solutions that will help us leapfrog the functionality gap that has been created
over the years and allow us to offer software that is currently UNAVAILABLE
anywhere in this sub segment of the marketplace.
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While we still are experiencing some attrition in this base, our core Internet
banking offering continues to bring in new customers and good cross-sales. With
our ATM/payments solution, the team closed strategic wins with several large
processors and financial institutions. One of these included a well-known global
card-issuer who plans to use our Postilion platform for authorization and
processing of its card transactions in 18 countries across the Middle East. The
proven performance of this platform is the basis on which we will be able to
rapidly bring additional capabilities to our entire customer base.
In summary, every component of the Postilion Segment has improved this quarter,
evidenced by the increase in revenues, margins and profits noted in our press
release tables.
Switching gears to our Enterprise business, I'm pleased to share with you the
substantial progress we've made to move roughly 50 of our current Enterprise 1.x
and 2.x customers to our most current production release. The U.S. banking
regulators are strongly encouraging all FDIC insured banks to have a plan in
place by the end of this year for multi-factor authentication. Interestingly,
this initiative will help us expedite these upgrades. We are on track to have
all but a couple of banks converted by Q4. These migrations get our customers to
a common release with enhanced feature/functions which will, in turn, help us
reduce our costs and improve quality.
For our Enterprise 3.5 suite, I'm also pleased with the progress we are making
with our Managed Introduction Program, where we are working with nine key
customers to prepare our entire organization for a broader, more aggressive
roll-out of this suite later this year. These customers range from several
super-community banks in the under $5 billion-dollar category to a several
retail oriented banks in the $18BB-$32BB range to a $45BB institution focused
its small and medium sized business customers to a couple of large insurance
companies which of course, includes State Farm. The point here is that this is a
diverse group of financial institutions that will give our professional services
and hosting teams the broad exposure and experience that we need to ensure a
successful rollout of this solution set later this year. We are in
pre-production test mode with most of these customers, and we expect to gain
feedback from production environments beginning in June. All early indicators
from our teams are that this is the highest quality code we have released in the
history of this company. I am confident that the extra time we took and the
thousands and thousands of extra test cases that we ran paid off.
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Our wholesale banking business continues to make progress against its goals of
consolidating platforms and improving customer satisfaction. As I mentioned last
quarter, we've have now taken three large-bank customers live on the newest
Corporate Banking application, which has allowed these banks to move their
largest and most profitable wholesale customers off antiquated systems this
quarter. This group of our banks customers is typically the institution's most
demanding and profitable accounts, and I am proud to say that our team and our
solutions met the test. Having one of these large institutions live in our data
center in the quarter contributed to the increase in hosting revenues.
We continue to have a strong relationship and productive partnership with the
State Farm Insurance Company, with 14 projects underway across multiple fronts
of their business. As you saw from our filing yesterday, State Farm has taken
the unprecedented step to issue a letter to S1 authorizing us to provide
additional perspective on our long-standing relationship. State Farm is our
largest customer, generating approximately 22% of our overall revenue last year
and approximately $140 million in revenue over the past three years... and has
historically been our largest shareholder. Our contract with State Farm provides
them access to source code, which gives them substantial flexibility on how they
go forward.
I want to touch on two questions we have gotten in the past: strategic
transactions - that is potential acquisitions and divestitures - and stock
buybacks. As we have said in the past, we evaluate any opportunities as they
arise. As you know, the Board has authorized share repurchase programs and we
expect that the Board will consider such programs in the future. We will let you
know about any such decisions when they are made. In the meanwhile, we will not
have any additional comment.
We believe we have established very good momentum this quarter and we look
forward to continuing this momentum especially if we did not have the business
distractions that have been in the news lately.
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In closing, I'd like to reflect on my first eight months back on the job. First,
I told you that we were going to take the time we needed to complete Enterprise
and get it right with the highest quality standards. Early indications are that
we took the right amount of to allow our folks to put software in the
marketplace that we truly believe is their very best effort. I also told you
that we needed to break down the silos in our business. We needed to get
decision making closer to the customer. The Multiple Business Units we depicted
in our financial presentation have gotten that right and our first quarter
performance serves as early validation. I told you that we needed to invest in
our heritage solutions and give these customers the attention and enhancements
they deserve after sticking with us over the years. We are doing that today, and
I believe we are getting that right. And finally, I told you that we would be
focused on getting our expenses more in line with our revenues. We are on track
to do this, and we remain focused on generating profitability on a consistent
and DEPENDABLE basis.
Do we have risks? Sure, just like any other company in the early stages of
delivering market-changing solutions. However, make no mistake about it... this
organization is multi-faceted with substantive GROWTH opportunities in multiple
markets that have yet to be realized. Our current plan calls for capitalizing on
these opportunities through solid execution that enables us to efficiently and
effectively execute against this plan.
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