Transaction Systems Architects, Inc. (Nasdaq:TSAI), today announced revenue of $84.8 million for the quarter ended June 30, 2006, and diluted earnings per share of $0.61.
Diluted earnings per share were positively impacted by the release of valuation allowances related to foreign tax credits and were negatively impacted by dilution from the acquisition of eps Electronic Payment Systems AG and other special and transitional costs.
"We consistently executed on our long-term plans during the quarter as we completed a strategic acquisition, continued to streamline our supply chain and furthered our ability to globally deliver and support our software solutions," said Philip G. Heasley, TSA's CEO. "These initiatives position us to successfully respond to the trends impacting the world's payment systems, including regulatory change, transaction volume growth and the need for improved payments productivity.
"Refining our global infrastructure is a critical component of driving growth for the Company," Heasley said. "Market dynamics and our own research suggest that the greatest opportunities for growth exist largely in the international market. As a result, we are in the midst of several key initiatives designed to structure our company to more efficiently address that demand. We believe these efforts will help us maximize productivity as we seek new market opportunities and continue providing world-class support for our mission-critical solutions.
"The acquisition of eps gives us a leading presence in the German market and expands the portfolio of products that we can cross-sell to our global customers," Heasley continued. "Germany represents the world's third largest market for electronic payments. Our new footprint there gives us an excellent platform to satisfy the region's need for payment solutions, especially with value-added products like our fraud detection and smart card management software. In addition, eps brings us an established presence in Romania, which plays an important role in our globalization initiatives.
"During the quarter we established a new subsidiary in Ireland to serve as the focal point for our international product development efforts," Heasley said. "This is a strategy that other major software companies have successfully adopted to optimize supply chain efficiencies and maximize shareholder return. The Irish company will oversee remote software development operations in Romania and elsewhere, providing us with low-cost centers of expertise and ensuring we remain price-competitive in supporting a growing international customer base.
"We gained further efficiencies by closing two offices in the U.S. and Europe that housed a small number of employees not concentrated in a specialized area," Heasley said. "We will continue to work opportunities like this to ensure that our organizational structure and our use of facilities around the world are as efficient as possible.
"Commencing on or about the end of the fourth quarter, the Company will establish its principal executive offices in New York City," Heasley added. "This move will bring us closer to key constituents. In addition, this month we strengthened our executive team with the appointment of Craig Maki as senior vice president responsible for corporate development. Craig comes to us from the investment banking firm Stephens Inc. and will play a key role in identifying future strategic opportunities.
"In summary, we had a solid quarter as we continue to execute our plans to grow the business. The Company continues to be well-positioned in the market as we engage with major banks, retailers and processors in identifying solutions to complex, multi-region and multi-year opportunities," Heasley said.
Third-Quarter Financial Highlights
Revenue was $84.8 million in the third quarter, a 9 percent increase over the same period last year. Revenue comprised software license fees of $42.0 million, maintenance fees of $26.0 million and services of $16.8 million. Monthly recurring revenue was $47.1 million compared to $46.3 million during the same period last year. Monthly recurring revenue consisted of monthly license fees of $17.7 million, maintenance fees of $26.0 million and services (facilities management) fees of $3.4 million. Monthly recurring revenue comprised 56 percent of total revenues in the quarter. International revenues were $55.5 million, or 65 percent of total revenues.
Operating expenses were $69.2 million compared to $62.8 million in the same period last year, an increase of 10 percent, and included approximately $1.5 million related to equity-based compensation expense that has no comparable basis in the prior year. The most recent quarter also included approximately $3.0 million of expense related to the S2 operation, down from $3.6 million in the second quarter of 2006 and in keeping with the Company's plan to reduce these expenses to approximately $2.5 million per quarter by year-end. The third quarter also included approximately $1.0 million of expense related to operations of the recently acquired eps business. In addition, the Company incurred special expenses during the quarter of approximately $600,000 related to M&A activity and approximately $700,000 related to globalization initiatives, including the establishment of Irish and Romanian operations.
Operating income was $15.5 million with an operating margin of 18.3 percent. This compared to operating income of $15.2 million with an operating margin of 19.5 percent for the third quarter of fiscal 2005.
Other income for the quarter was $1.4 million compared to $0.7 million for the same period a year ago.
The tax benefit of $6.4 million comprised a tax provision of approximately $6.0 million offset by approximately $12.4 million representing the Company's release of valuation allowances related to foreign tax credits during Q3. Factors leading to the release included the Company's improved foreign earnings stream from existing operations and from the acquisitions of S2 and eps, and the Company's use of material components of foreign tax credit carryovers in its 2005 federal tax return filed during the quarter. The resulting release of $12.4 million in foreign tax credit allowances had a positive impact on net income during the quarter and added $0.32 to diluted earnings per share. The Company continues to review its valuation allowances against deferred tax assets and from time to time may adjust these accordingly.
During the quarter the Company moved certain intellectual property rights to its Irish subsidiary as part of its globalization initiatives. The Company expects that, long term, these initiatives will result in future reductions in the Company's overall effective tax rate.
Net income and diluted earnings per share
Net income for the quarter was $23.3 million, or $0.61 per diluted share, compared to $10.0 million, or $0.26 per diluted share, during the same period last year, an increase of 133 percent and 135 percent, respectively. Diluted earnings per share were positively impacted by the release of valuation allowances related to foreign tax credits of $0.32, and were negatively impacted by $0.04 from the acquisition of eps and other special and transitional costs and $0.03 from equity-based compensation expense.
Cash and stock activity
The Company's cash, cash equivalents and marketable securities as of June 30, 2006, were $176.1 million compared to $189.7 million at the end of the second fiscal quarter. The most recent quarter reflects payment of $16.1 million in connection with the eps acquisition and approximately $10.8 million for repurchase of the Company's stock, offset by $4.6 million in proceeds from employee stock option exercises. Net operating cash flow for the third quarter was $4.5 million.
During the quarter the Company repurchased 280,645 shares of its common stock. Through June 30, 2006, the Company has repurchased a total of 2,235,731 shares for approximately $57.8 million. During the quarter the Company issued 330,827 shares in connection with the eps acquisition. Total shares outstanding were 37.7 million as of June 30, 2006.
Backlog for the coming 12 months was $258.2 million as of June 30, 2006, as compared to $257.5 million for the quarter ended March 31, 2006. The monthly recurring portion of backlog, which includes monthly license fees, maintenance fees and facilities management fees, amounted to $191.6 million. The non-recurring portion of backlog, which totaled $66.6 million, includes other software license fees and services.
As of June 30, 2006, the Company's estimated 60-month backlog was $1.092 billion. For comparison purposes, as of March 31, 2006, the Company's estimated 60-month backlog was $1.050 billion.
The Company added seven new customers during the quarter and sold 20 new applications to existing customers. Another 12 customers licensed capacity upgrades valued at $100,000 or more.
Americas revenue of $47.0 million compared to $42.5 million for the third quarter of fiscal 2005. The Americas revenue included U.S. revenue of $29.3 million and non-U.S. revenue of $17.7 million compared to $31.6 million and $10.9 million, respectively, for the same period last year. During the third quarter the Company licensed its ACI Payments Manager software to a top five U.S. bank, licensed the ACI Retail Commerce Server to a major retailer in Puerto Rico, and licensed major capacity upgrades to seven customers including a top 10 U.S. bank. ABN AMRO in Brazil, a user of ACI's fraud detection software, was recently acknowledged with an industry award for having that country's best fraud detection operation.
Revenues for the Europe/Middle East/Africa region were $29.7 million compared to $27.6 million for the same period last year. Key sales included the licensing of BASE24-es for Enhanced Authorization at a top five bank in the Netherlands and at a top card processor in Italy, licensing of ACI Proactive Risk Manager at banks in France and Bulgaria, the sale of ACI Smart Chip Manager at a major Italian bank, and the licensing of a major capacity upgrade of ACI Communication Services at a top five bank in the United Kingdom.
Asia/Pacific revenues were $8.1 million compared to $7.9 million for the third quarter of 2005. Major sales in the region included the licensing of BASE24-es at the largest bank in the Philippines and at a major bank in Malaysia, and a significant capacity upgrade at a major bank in Thailand.
The Company's revenue guidance for 2006 remains at a range of $348 million to $360 million. The Company has revised its diluted earnings per share estimate for fiscal 2006 from a range of $1.51 to $1.63 to a range of $1.78 to $1.90. The revised earnings per share estimate takes into account the addition of $0.32 from the release of valuation allowances related to foreign tax credits, offset by $0.04 related to the eps acquisition and other M&A activity and $0.01 related to globalization initiatives in the third and fourth quarters.
The Company's long-term objectives continue to be double-digit annual revenue growth and 12 to 15 percent annual growth in diluted earnings per share.Download the document now 39.6 kb (Adobe Acrobat Document)